Can These Stocks Bounce Back?

However hard the market slams a stock, there's always the chance it'll come bouncing right back. We'll consult our Motley Fool CAPS community to find shares on the rebound, examining one specific sector of the economy in search of companies with rising CAPS ratings.    

There are 248 stocks listed under "diversified services" in the CAPS' screener, and more than a handful of them carry well-respected four- and five-star ratings. Those accolades mean our some of our 170,000 CAPS members are confident that these stocks will beat the market in the months ahead, but let's see what members are saying about the ones below:

Company

CAPS Rating Today

Recent Price

52-Week Price Change

Estimated

5-Year Growth Rate

China Security & Surveillance Technology (NYSE: CSR  )

*****

$4.95

(42.3%)

17%

Paychex (Nasdaq: PAYX  )

****

$32.31

5.4%

12%

SAIC (NYSE: SAI  )

****

$16.46

(12.9%)

8%

Source: Motley Fool CAPS; Yahoo! Finance.

The markets may be feeling better about the economy after a few reports have offset much of the negativism. The S&P 500 is up almost 13% over last year, and CAPS' diversified services stocks have done twice as well, with the average stock up more than 25% from a year ago.

AMERCO is better known by its subsidiary U-Haul, which doubled in value, no doubt brought on by the housing crisis as people packed up and left their homes. Restaurant reservation service Open Table tripled. Maybe people ate out a lot more because they didn't have a mortgage.

Let's take a closer look at why investors think some of these other companies won't be jumping from the frying pan into the fire.

Some spring in its step
There is a classic battle shaping up between institutional investors, who are accumulating larger positions in China Security & Surveillance Technology, and short-sellers, who are targeting it for a takedown. I'm going to have to lean in favor of the short-sellers here.

China Security & Surveillance Technology has been heavily indebted the past few years, but there was a precipitous drop in long-term debt last year. Debt was one of the reasons CAPS member dsherid2 was cautious about the stock. But the company made dilutive share offerings and used the proceeds to pay off its notes held by Citadel Equity.

Not a bad thing, you might think, except the company was forced into this because its CEO had pledged virtually all of his shares to the debt of another company he owns, Whitehorse Technology. If the value of the shares had fallen to a certain level, Whitehorse would have defaulted on its debt. If that had happened, the CEO would have lost his shares and China Security & Surveillance Technology would have been in default on the Citadel loans. And that's essentially what happened, though no default was declared.

China Security & Surveillance Technology and Whitehorse scrambled to work out a deal with lenders. It ended up with the company diluting shareholders and using the proceeds of the offerings to buy back the Citadel notes. That may have removed the potential for a default, but it wasn't good governance by management, so I'm heading over to CAPS to mark it to underperform. Let us know what you think on the China Security & Surveillance Technology CAPS page.

Coloring between the lines
Unlike rival ADP (NYSE: ADP  ) , which counts more large corporations among its clients, Paychex relies on small and medium-sized businesses to grow. Virtually all of its customers are companies with fewer than 50 employees. If that engine were to stop working, so would Paychex.

Regulations are coming that might make it harder for small business to be a growth engine for our economy. For example, as part of reforms, next year businesses will be required to report on a 1099 tax form any purchases totaling more than $600 for a year. Companies need to get their supplier's tax ID number and send it to the IRS, and the suppliers need to get their customers' information, too. Failure to file will carry penalties of up to $1.5 million. It adds up to more recordkeeping for businesses.

H&R Block (NYSE: HRB  ) and Intuit (Nasdaq: INTU  ) might benefit, but small businesses will suffer, putting a damper on Paychex's long-term growth. Yet 96% of CAPS members rating the company look for Paychex to outperform the market. Maybe they think this rule will be repealed. Add your opinion on the Paychex CAPS page.

The defense rests
Defense contractor SAIC has won a series of contracts, including one last week for the U.S. Army's research laboratory totaling $400 million over five years. Earlier, it won one worth $343 million from the U.S. Army Space and Missile Defense Command that it will share with L-3 Communications (NYSE: LLL  ) .

Last month, the market sold off SAIC's stock as contract delays undercut the company's profit estimates for the fourth quarter, but that has turned into a flood of new business. Shares have rebounded 7% since then, and the contracts should provide the company with a good flow of business for several years.

Follow the contractor's progress on the Fool's free portfolio tracker and add your comments on the SAIC CAPS page.

The ball's in your court
There are many factors that go into whether a stock is a buy or a sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Head over to CAPS today and share your thoughts about whether you think these stocks are ready to bound higher.

Paychex and SAIC are Motley Fool Inside Value picks. OpenTable is a Motley Fool Rule Breakers choice. Automatic Data Processing is a Motley Fool Income Investor selection. Motley Fool Options has recommended a write-covered-straddle position on Paychex. The Fool owns shares of SAIC and L-3 Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.


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