5 Superball Stocks

In my recurring Fool column, "Get Ready for the Bounce," we search for future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a fallen stock to bounce back?

 Nope. Sometimes stocks fall hard, in far less time than a year. And like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we'll look at a few equities that've suffered dramatic drops over the past week. With a little help fr om the 170,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Companies

How Far From 52-Week High?

Recent Price

CAPS Rating (out of 5)

Applied Materials (Nasdaq: AMAT  ) -11% $15.00 *****
Mosaic (NYSE: MOS  ) -14% $76.28 *****
Kodiak Oil & Gas (NYSE: KOG  ) -18% $6.28 ****
Ivanhoe Energy (Nasdaq: IVAN  ) -18% $3.17 ****
North American Palladium (NYSE: PAL  ) -21% $6.34 ****

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
There's no two ways about it. If you owned any of the five stocks named above last week, you're significantly poorer for it today. So what went wrong?

It's not always easy to say. While price declines sometimes have clear catalysts -- Citigroup's decision to downgrade Mosaic on Wednesday, for example, or Goldman's musings that "there is no upside left" in the semiconductor industry, weighing on Applied Materials -- other times, stocks just plain fall victim to the Law of Gravity.

All five of the stocks named above have enjoyed strong run-ups in price over the past three months. But when sprinting up a mountainside, even the strongest runner sometimes needs to stop for a breath. Lacking any obvious news items to explain the price declines at North American Palladium, Ivanhoe Energy, or Kodiak Oil & Gas, therefore, my hunch is that this is all we're seeing here today -- stocks pausing for a bit of a breather. (And as fellow Fool Isac Simon argues, this might even be "the pause that refreshes" for independent oil producer Kodiak.)

Fools seem to agree, as we see all five of the stocks named above continue to enjoy strong support from the CAPS community of investors. Two stocks in particular get our highest ratings this week: Mosaic and Applied Materials. For reasons I explained last week, I have concerns about Mosaic's valuation -- which is why today we're going to focus instead on ...

The bull case for Applied Materials
According to CAPS member risingaro, the main reason to own Applied Materials is that there's a "new semi boom" under way, which "will require lots of equipment upgrades." In January, Intel (Nasdaq: INTC  ) announced plans to capitalize on said boom, promising to spend $9 billion on capital improvements this year and daring Advanced Micro Devices (NYSE: AMD  ) to try to keep up.

When just one player in the global semi industry promises to spend an amount almost equal to Applied Materials' entire annual revenue stream -- I have to say that sounds like pretty good news for Applied Materials. But it's not the only reason to like the stock. For more than a year, CAPS member skopchajr has touted the company as a company possessed of a "strong balance sheet, superior cash flow, and wide moat dominance."

All-Star investor MarkGillCPA agrees, and furthermore believes that the stock price presents a bargain: "Currently trading at 10x fwd earings, the stock is cheap on both a DCF and Fwd P/E basis. The 2% dividend doesn't hurt."

Cash is king
I'm inclined to agree as well. Sure, at first glance, Applied Materials shares seem a bit pricey at nearly 15 times trailing earnings, and long-term growth of just over 10%. But if you look a little closer, the stock turns out to be considerably cheaper than it appears.

Consider: A review of the company's cashflow statements shows that cash generation at A-Mat currently outpaces reported GAAP "earnings" by more than 20%. Meanwhile, the company's balance sheet is plump with $2.5 billion in net cash. Toss these numbers into the equation, stir briskly, and what you come up with is an enterprise now valued at just under 11 times annual free cash flow. That's not bad for a purported 10% grower. Factor in the company's 2.1% dividend yield, I'd even go so far as to call the stock a bargain.

Or at least -- that's my opinion. But what do you think about Applied Materials? Is the stock really as cheap as it looks, or is it "cheap for a reason?" Click over to Motley Fool CAPS today, and tell us what you think.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 464 out of more than 170,000 members. The Fool has a disclosure policy.

Intel is a Motley Fool Inside Value recommendation and Motley Fool Options has recommended a diagonal call position on Intel. The Fool owns shares of and has bought calls on Intel.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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