Get Ready for the Bounce: NYSE Edition

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "New 52-Week Lows" list at MSN Money:

Companies are selected from the "New 52-Week Lows" list published on MSN Money on the Saturday following close of trading last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Knives and knaves
By close of trading Friday, no fewer than 346 stocks on the Nasdaq had landed with dull thuds at their 52-week lows. That's roughly one stock in nine, people. The NYSE fared even worse; 406 listings hit bottom (one out of every seven).

Surveying the carnage, you can be forgiven for thinking the sky really is falling. Me, I've got a different point of view. I think we're in a turkey shoot. The opportunities to buy high-quality, well-respected stocks at bargain-basement prices look so plentiful, in fact, that in a first for this column we're going to conduct editorial mitosis, and tackle the indexes one at a time.

The table above, you will notice, contains only NYSE-listed stocks. I'll address the potential Nasdaq bouncers in a separate column. But for now, let's dive straight into the buy arguments for the best-rated stock from the NYSE side of the market.

The bull case for Walgreen

• CAPS member TheSmartMoney keeps the bull argument simple: "Following the rule of buying best in breed leads investors to [Walgreen]. Better looking stores than Rite-Aid, and their Walgreen's brand products help make profit margins solid. CVS (NYSE:CVS) stores lay-out does not work as well as [Walgreen's]."
  
• Moreover, Walgreen is cheap. According to CAPS All-Star mm20001 just last month: "Despite the fact that Walgreen's has grown earnings at an amazingly steady 15% annual rate for the last 8 years (and longer), the stock is actually cheaper today than it was 8 years ago. The stock price ... has now come down to a reasonable P/E of 16 for the 12 trailing months. Add in the little debt on their books (as compared to CVS, for example), and 5yr growth estimates of 14%, Walgreen's is a long-term buy today."
  
• Finally, skeagle00 likes the chain's "Expanding locations, prudent growth funded internally with no debt. In time, a cash cow."

I agree, but with one caveat. With its P/E now sitting south of 13, but long-term growth rates still projected to beat 13%, Walgreen looks to me like a best-of-breed operator selling for a favorable PEG ratio. Or as the venerable Warren Buffett might put it, Walgreen is a "great company at a good price."

That said, here's the caveat: Remember how skeagle00 said Walgreen would "in time" become a cash cow? Well, scanning the company's cash flow statements for the past decade, I'm wondering just when -- if ever -- that time will come. Walgreen may have emerged from its late-'90s free cash flow-negativity, but the company is still nowhere near generating the amount of free cash flow that it reports as net earnings under GAAP. Over the most recent 12-month period, for example, Walgreen generated just $814 million in free cash flow -- less than 40% of its reported net income.

That disparity doesn't seem to worry CAPS members, who continue to rate the stock a "buy" by overwhelming margins, and yet it does worry me. Over the years, I've seen many a company with an otherwise healthy-looking P/E, but minimal free cash flow, blow up. Outback, Cosi, and Starbucks (NASDAQ:SBUX) all come to mind. Maybe I'm just being paranoid, but to this Fool's eye, I see a similar pattern emerging at Walgreen.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Walgreen -- or even what other CAPS players are saying. We really want to hear your thoughts. Does the dearth of cash flow going into a recession have you reaching for the antacid? Or, knowing that this drugstore can count on repeat business in all economic environments, do you spell relief W-A-L-G-R-E-E-N? Click on over to Motley Fool CAPS and tell us what you think.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.