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:

Company	52-Week High	Recent Price	CAPS Rating (out of 5)
Valero Energy (NYSE: VLO  )	$21.78	$16.10	*****
Cisco Systems  (Nasdaq: CSCO  )	$27.74	$20.81	****
Hewlett-Packard	$54.75	$38.00	****
RRI Energy (NYSE: RRI  )	$7.64	$3.47	****
United States Natural Gas  (NYSE: UNG  )	$12.22	$6.24	***

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.

And what a trove of fallen silverware we have to pick from today. Notwithstanding Friday's market bounceback, shares of U.S. Natural Gas are scraping 52-week lows after a week that saw natural gas prices tumble 12%. Cisco and Hewlett-Packard are right down there with 'em, twin victims of -- depending on your viewpoint -- either investor disgust with the high prices they're paying for acquisitions lately, or general fear of a tech meltdown, exacerbated by Intel's dismal outlook last week.

But it's not all bad news. Some of these stocks seem to be floating lower for the flimsiest of excuses. Valero Energy, for example, which aside from a couple of minor refinery "leak" reports, sells as cheaply as it ever has in a year. And RRI Energy is down for no particular reason at all, at least that I can see. Little wonder, then, that CAPS investors remain generally optimistic about these stocks, according four- and five-star ratings to all of 'em (except USNG, of course).

The one investors seem to like best, however, is Valero, making it our featured stock this week. So onward with ...

The bull case for Valero Energy
What's the story behind Valero's popularity? CAPS investor Geofiz calls it "very much a turnaround type of pick. Valero has managed to continue their profitibility through some very tough times. Size does matter, and VLO is well positioned to take advantage of just that. ... The real attraction is the discount to book..."

As closecover points out, Valero's stock currently sells for "something like 60% of book value … way too cheap to pass up."

And birder1500 sees even more value in the stock: "The assets are worth about 50% than the stock is selling at on a replacement cost basis, maybe more. That is another point in its favor."

And let's not fail to point out the "NIMBY" factor. You see, it's not just that Valero's assets are selling for less than what it would cost to replace them. It's that even a refiner inclined to duplicate these assets would be hard put to receive permits to build new refineries -- at least, "Not In My Backyard." Homeowners are loathe to live downwind of stinky refineries, after all. As a result, whenever demand for gasoline runs hot, stocks in refiners like Valero tend to run even hotter, because it's awfully hard for a competitor to build new capacity and ratchet up production.

Sure, the middle of a recession isn't a great time to find rising gasoline demand. But it looks to me like Valero has everything it needs to survive the current slump and emerge unscathed on the other end, when gasoline demand perks back up (whenever that may be). While the company appears to be "unprofitable" under GAAP accounting standards, you see, it actually generated $425 million in free cash flow over the past year. (No mean feat there. Refining rivals Suncor (NYSE: SU  ) , Tesoro (NYSE: TSO  ) , and Frontier Oil (NYSE: FTO  ) are still busily burning their cash.)

Foolish takeaway
Plus, let's not forget the big picture here. Over the past decade, Valero has done even better than it's doing today, consuming cash in only two years, and generating an average of nearly $1.2 billion per year. If you value Valero on this "usual" cash generation, the stock's selling for less than eight times free cash flow today -- an undeniable bargain.

But even if you value the stock only on what it's making in the middle of a recession, and 21 times free cash flow doesn't look too unreasonable relative to analyst projections for 17% annual long-term growth. Toss in the stock's tidy 1.2% dividend, and Valero starts to look quite attractive indeed.

At least, that's what I think. But what we'd really like to hear are your thoughts on Valero. Is it due for a bounce, or do you see the recession dragging on even further, depressing gasoline demand, and keeping Valero stuck in a ditch? Take a moment to drop by Motley Fool CAPS and tell us what you think.