3 Sinking Stocks for Savvy Investors

The second quarter of 2010 has been a bad one.

The broad market is finally up a bit on the year because of a recent rally, but stocks have been anything but steady. Because small-cap stocks are generally more volatile, they've experienced a bit of a greater drop than most. That's almost to be expected. However, what's interesting is that large-cap stocks have actually fallen a slight bit more than the broad index -- and these are the billion-dollar companies that usually hold up well in a recession or a double dip.

The good news is that now the market is ripe for cherry-picking. Hundreds of small and large successful companies have gotten hammered as of late, and that means there are some great value plays to be had.

To get you started, I've screened for stocks that have dropped significantly over the past three months and that are trading for very low price-to-earnings ratios. In addition, we've utilized our 170,000-strong Motley Fool CAPS investing community to select only the best of the best, those companies with either a four- or five-star ranking. Here are three of the top companies from the list:

The danger of Chinese small caps
Small- and micro-cap stocks are already known for being extremely volatile, but Chinese small caps seem to take the cake. Duoyuan Printing, a manufacturer of printing equipment and solutions, has been in a complete free fall since its decision to let go of big-four auditing firm Deloitte Touche. Following the exit of Deloitte came another surprise -- the resignation of the company's chairman of the audit committee, not exactly a positive sign that things are going well in the accounting department. Investors in Chinese companies are no stranger to accounting irregularities, as big-time companies such as Fuqi International (Nasdaq: FUQI) didn't file financial statements to the Securities and Exchange Commission for quite some time -- probably most of the reason its stock has fallen more than 50% so far this year (although it recently filed an 8-K with the SEC).

China Natural Gas has had similar problems. It provided an update to its financial statements, but not the kind investors like to see. The natural gas provider has said that its previous 10-K and 10-Q "can no longer be relied upon." However, the company has since hired Ernst & Young to provide better internal controls, a move that the company obviously hopes will boost optimism in the company's prudence.

Although these companies definitely have problems -- no doubt about that -- if you believe management has the ability to turn things around, you may just get a highly rated stock for a dirt cheap price.

Biotechs can be shaky
PDL is a biotech company that develops and manufactures drugs and treatments that can help with life-threatening diseases. The company's stock has been dropping after Genentech/Roche wrote the company a letter saying that four of its drugs were in fact not infringing on PDL's patents in Europe. PDL receives a significant amount of royalties from both Genentech and Novartis (NYSE: NVS), so the letter certainly could have taken investors by surprise. Nevertheless, the company pays a whopping 15.80% dividend (largest in the sector, in front of Eli Lilly (NYSE: LLY) at 5.8%) and recently said it expected revenue to come in 20% higher this quarter than in the year-ago period.

The Foolish bottom line
Don't let fear get the best of you -- a falling or stagnant market can be a great thing in the long term if you take advantage of the opportunities in front of you. Fortunately for investors, there's no shortage of options, and both small- and large-cap stocks just happen to be some of the best around.

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