Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. 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.

It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:

Company

52-Week High

Recent Price

CAPS Rating (out of 5)

Inergy (Nasdaq: NRGY  ) $43.95 $33.00 *****
Cemex (NYSE: CX  ) $10.72 $7.50 ****
United Microelectronics (NYSE: UMC  ) $3.52 $2.38 ****
Southwest Airlines (NYSE: LUV  ) $14.32 $10.42 ***
Old Republic International (NYSE: ORI  ) $14.18 $10.75 ***

Companies selected from the list of stocks hitting new 52-week lows as reported on finviz.com. Recent price and 52-week high provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

The week in weak stocks
Fears of financial Armageddon in Washington notwithstanding, last week was a good one for investors. The S&P 500 enjoyed a welcome respite from panic, rising 2.2% -- but not everyone was so lucky. This being earnings season, and this not being Lake Wobegon, we have to expect there will be some losers scattered among the winners, and up above, you see five of 'em.

Beginning at the bottom, mortgage guarantor and title insurer Old Republic became collateral damage to a big earnings miss at fellow PMI insurer MGIC Investment (NYSE: MTG  ) . MGIC shed 23% of its market cap Monday, and through no fault of its own, Old Republic lost 4% in sympathy.

A similar sympathetic decline hit Southwest Airlines after a week of mixed news from its rivals. United Continental beat expectations Thursday, and US Airways' results topped estimates, but AMR (NYSE: AMR  ) reported a pretty massive loss for the fiscal second quarter. With oil prices hovering near $100, the worry seems to be that what's ailing its competitors won't be very good news for Southwest, either.

198-pound weaklings?
Higher up the list, and also earning better marks from CAPS members, we find United Micro, Cemex, and Inergy. Now Inergy -- I warned you about that one earlier this month. But what's the deal with United Micro and Cemex? Can we perhaps find some value there?

Perhaps. I have to admit that I'm not completely convinced about United Micro, cheap it may appear (the P/E's only 7, after all). And yes, it's also got a superb dividend to recommend it (8.4%). My concern with the stock is that it's currently burning cash -- about $422 million over the past 12 months. While historically United Micro has been pretty strong in the free cash flow department, I believe investors may be better served by an investment in Cemex. Here's why...

The bull case for Cemex
The world's largest supplier of construction materials, Cemex couldn't help but struggle as the global construction industry imploded over the past few years. And yet, things seem to have stabilized there somewhat, and CAPS member BlackBart12 believes that, "as the economy improves, delayed infrastructure projects will [also] drive the need for Cemex's products."

Meanwhile, Cemex itself has kept its business humming well through the downturn. According to All-Star investor alphadogg, the stock's worth a "$20 target based on fcf analysis."

Viewed another way, Cemex looks cheap at 0.5 times book value. CAPS member idvst8 thinks the company has "good assets," albeit it is "over levered."

Cemex: Rock solid performance
And that's the real problem with Cemex. As alphadogg avers, free cash flow at Cemex is simply tremendous. This company has generated more than $1.4 billion in free cash over the past 12 months, and $10.2 billion over the past five, very rocky, years. On the other hand, a series of ill-timed and over-priced acquisitions made just prior to the economy imploding in 2008 have left the company saddled with nearly $17 billion in net debt.

Will so much debt weighing it down, I can't promise any immediate "bounce" out of Cemex. More likely, what we can expect is a slow, steady march to higher share prices as the company deploys its immense cash machine to pay down debt. (Reducing interest payments and accelerating free cash production every step of the way.) It's going to be a years-long process. But yes, I do believe Cemex will reward shareholders in the end.

Disagree? Hey, it's a free country, and at The Motley Fool, we welcome dissenting views. Tell us your opinion of Cemex on Motley Fool CAPS, or in the comments box below.

Fool contributor Rich Smith owns shares of Southwest Airlines. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 593 out of more than 170,000 members. The Fool has a disclosure policy.

Motley Fool newsletter services have recommended buying shares of Southwest Airlines.

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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