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.

Beware the banking bust
Ugh. Last week was not a good one for banks -- or banking investors, for that matter. Concerns over the short-term effects of the robo-foreclosures scandal have investors running scared, and they're dumping bank stocks left and right. As you can see from the above chart, not only are these four banking stocks scraping the bottom of their 52-week lows, but investor sentiment that they'll ever recover is also dim indeed.

No news of note came out last week to explain the declines at Capitol Federal or TFS Financial -- except for the mortgage mess. First Horizon actually announced good news -- its second straight quarter of positive earnings. Yet for all this, CAPS investors give most of these stocks abysmal one-star ratings. Of the four, only Bank of America receives anything approaching a respectable rating, at three stars. But does B of A deserve even that much?

The bull case for Bank of America
CAPS member Teacherman1 thinks it does -- and that it could deserve a whole lot more: "The banking sector as a whole, and especially the 'BIG' banks are having mortgage woes (not as drastic as it might appear at first glance in my opinion), but not unexpected. ... I expect that over the long run, this will get up to the $40 to $50 range as the economy recovers and their acquisition of Merrill and Country Wide start to pay off."

randomtask16 agrees: "Mortgages will hurt for now, but 'it's just a flesh wound'. [Bank of America] will do just fine in time... " Meanwhile, as yourdailylogic points out: "This company has improving capital ratios and cash reserves. Merril will turn out to be an asset. Plus, the consolodation of the banking industry will provide [Bank of America] w/extrodonary revenue growth once housing and the economy improve."

But if its long-term picture looks so bright, why did B of A sell off so hard last week? None of the three other national megabanks -- JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Well Fargo (NYSE: WFC) -- hit 52-week lows last week (though Wells and JPMorgan were close). But B of A did.

Perhaps you'll find the reason for B of A's punishment in Friday's Wall Street Journal column describing the meltdown. Reporting on Thursday's sell-off, the Journal observed: "Bank of America Corp., which is potentially among the most affected, led the declines, with a drop of more than 5%." [Emphasis mine.]

It depends on what the meaning of the word "is" is
There's just one problem with that quote: It should have said "isn't," instead of "is." You see, the day before the Journal tagged B of A as one of the riskiest stocks in mortgage banking, it also published a list of the companies that actually did have the most exposure to "1-4 family loans in foreclosure" (by percentage of such loans in foreclosure). B of A placed 15th on this list, behind Wells Fargo, JPMorgan, PNC Financial (NYSE: PNC), and SunTrust (NYSE: STI).

The publicly traded bank that really did have the biggest-percentage foreclosure exposure? Barclays PLC (NYSE: BCS), whose "Barclays Group US " subsidiary has 17.74% of its single- and small multifamily home loans in foreclosure. (For comparison, B of A's exposure is just 4.39%.)

Oops!
I'm not saying that B of A is one of Wall Street's shining lights. However, its forward P/E ratio of just 8.1 is right in line with the 8-ish P/Es at JPMorgan and Wells, and not too far off Citi's 9.2. Meanwhile, at just less than 0.6, B of A sports the lowest price-to-book value ratio of the bunch.

Once investors realize that B of A is not, in fact, as risky as the Journal suggested it was on Friday (or at least, not quite as risky) -- and that it's arguably a bit cheaper than its peers, to boot -- I think that should be good for a bounce.

What do you think? Tell us about it on Motley Fool CAPS.