Get Ready for the Bounce

"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 "52-Week Lows" list at WSJ.com:

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

The menace of momentum
Momentum is funny thing. Sometimes, once a stock starts trending down, it keeps on doing so for longer than it objectively "should." And we saw a lot of such momentum-driven downwards dives last week.

Beginning at the bottom, drug developer Isis caught the Mummy's Curse when higher R&D spending forced a wider loss than Wall Street had been expecting. At American Public Ed, it was enrollment declines that bit into earnings. Meanwhile, a ratings cut by Moody's sent Vulcan into the basement, taking rival construction materials stock Cemex along for the ride.

Regardless, most investors still rate most of these companies highly, with optimistic four-star assessments predominating. One stock stands head and shoulders above the rest, however -- despite reporting earnings numbers that disappointed Wall Street fully as much as its companions on today's list. But does Unit Corp deserve the full five-star CAPS treatment?

Let's find out.

The bull case for Unit Corp
CAPS member blissfulone introduced us to Unit back in the summer of '07 as "one of the premier publicly held energy companies with drilling and e&p operations which help the company perform well in many market environments. Great management-conservative co.-solid results over the long-term."

A year ago last spring, All-Star investor Trimalerus noted that while "natural resources and energy sectors have taken a beating ... they are key stocks to help us out of this recession."

And just last May, Randseed called Unit in particular "a great company" in the energy sector, albeit a bit of "a cyclical stock."

The ups and downs of Unit Corp
"Cyclical?" I'll say. One year ago, Unit Corp was selling for about $35 a share. Over the course of the year, it ran as high as $51 -- but has since swung back the way it came, given up all its gains, and today sits right back down at the $35 level. Talk about a seesaw! But... could what's gone down so fast, go shooting skyward once again?

I'm not so sure it can, or should. Fact is, while I agree that Unit has gotten beaten up a lot lately, it still looks a bit over-priced to me today, with a P/E ratio of nearly 13, but long-term growth projected at only 10% per year (and no dividend to help close the valuation gap).

What's keeping Unit from pumping out more profits, and getting that P/E down to a more attractive level? According to management, it's primarily a question of demand and supply. Unit demands more "fracture stimulation services and connections to gathering systems" than the market can currently supply. As a result, delays in getting wells online "will continue throughout the year due to limited availability of these services." And this supply bottleneck forced Unit to cut its guidance drastically for the fiscal year, to a level below its own most pessimistic previous projections.

Foolish final thought
What's bad news for Unit, however, may turn out to be good news for other companies. Seems to me, if Unit is having trouble getting access to the fracturing services it needs, this suggests there's pricing power to be found in the companies that provide such in-demand services. Companies like Schlumberger and Halliburton (NYSE: HAL).

Indeed, Halliburton just reported superb profits growth in its most recent quarter, and with further growth predicted in the year to come, sports a forward P/E ratio of less than 12 -- and long-term growth projected at over 11%. To top it all off, Halliburton offers investors one thing Unit does not: a respectable 1.3% dividend yield. While I cannot say with any confidence that Unit's stock is destined to rise, it just might have led us to another stock that will.

But enough of what I think. Which of these three stocks looks like the better deal to you? 

Click over to Motley Fool CAPS now, and cast your vote for:

• Unit Corp or
• Schlumberger or
• Halliburton