5 Superball Stocks

When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.

It's been awhile, 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:

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
What a week. As markets melted under a late summer sun, more than 5,400 stocks declined in value. More than 700 of these lost 10% or more of their market cap ... including each of the companies named above. So what went wrong?

The causes aren't always clear. Beginning at the bottom, Geron got gutted for no particular reason, as far as I can tell. Synovus Financial is also scraping a 52-week low, even though it's been highlighted as one of several banks enjoying significant insider buying. Synovus also just got upgraded to outperform by the analysts at Credit Suisse. Go figure.

In other cases, the answer is pretty obvious. Level 3 Communications suffered a big downgrade from ace telecom investor DA Davidson. Frontline was the subject of a high-profile Financial Times report last week, which pointed out the stock's "vulnerability" as day rates for renting an oil tanker plunged to $1,795, a good $28,000 below what the company needs to break even on the cost of operating its ships. (Gulp!)

And then there are cases like Telefonica. This Spanish telecom's only notable news last week was its announced plan to rationale its lines of command, putting all of its "digital" assets in a single group to be designated "Telefonica Digital." While investors seem unhappy about this, the move doesn't really affect the value of the company -- which, according to CAPS investors, is exactly what they find so attractive about it.

The bull case for Telefonica
Ace CAPS investor tenmiles writes that "TEF looks attractive to me from current $23 level after recent pullback in part related to the Euro debt crisis. Ninety year old company, 100B market cap with dividend yield in excess of 7% (have to pay foreign tax on part if US investor). Company investing heavily in more rapidly growing Latin American regions-announced 1.5B new investment in Peru. Dividend has seen annual increases for last five years-likely total return market beater from these levels for those holding over next several years."

Yet as winebroker2000 points out, Telefonica has been unjustly "beaten down by bad press on Europe as a whole. Latin American operations will be their cash cow..."

Thus, CAPS member sudspark tells us we've now got a chance to buy a stock offering "easy 15% upside including dividends."

Of course, sudspark made that prediction about 18% ago. If he's right, investors today should be looking for a 33% gain! But is that really realistic? What could set this superball bouncing?

The harder they fall, the bigger they bounce
Actually, the same drop in stock price could prime Telefonica for a rebound. At just six times earnings, Telefonica sells for a lower P/E than the United States' AT&T (NYSE: T), and less than half the valuation of Verizon (NYSE: VZ). As valuations converge, this should turbocharge returns on the Spanish stock. Plus, Telefonica's 9% dividend yield is roughly 50% bigger than the dividend yields at AT&T and Verizon. Thanks to the dividend alone, you've already got 9% annual profits "baked into" Telefonica's stock price.

Granted, there is risk in the stock. For one thing, according to Yahoo! Finance, Telefonica's dividend yield today is already 182% larger than the company's net profits. Unless profits rebound, that's clearly unsustainable. So let's consider a worst-case scenario. Let's say Telefonica sees the writing on the wall and cuts its dividend in half -- giving us a 4.5% yield.

In this case, you'd still be looking at a stock yielding 4.5%, growing profits at close to 3% per year (according to analyst estimates), yet costing just six times annual profits. All that would still work out to about a 0.8 PEG ratio on the stock -- requiring about a 25% rise in price to bring Telefonica up to fair value.

Time to chime in
To me, that looks close enough to sudspark's estimate to suggest that our CAPS members may be onto something. Dividend rich, value-priced, and five-star rated on CAPS, Telefonica looks like a winner.

Disagree? Feel free. Click over to Motley Fool CAPS now and tell us why.