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.

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 selected from the list of stocks hitting new intraday 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
Last week wasn't a great one for stocks, with major indices dropping anywhere from 2% to 2.5%. Only a few dozen companies (out of a cast of thousands) actually hit 52-week lows, true. But with the Dow Jones Industrial Average (INDEX: ^DJI) hovering around 12,000 (after flirting with 10,000 just a few weeks ago), what's surprising is that any stocks are anywhere near a yearlong low.

Then again, considering the news that's been coming out on these companies, maybe we shouldn't be surprised. Take Dendreon for example. (Please!) Disappointing sales numbers for Q3, combined with merely "modest" expectations for growth over the next several quarters, added up to a 37% decline in share price Thursday. That's one way to get to a 52-week low in a hurry...

Neck-and neck-with Dendreon is Sony. A problem-plagued year is finally, mercifully, coming to an end for Sony -- but according to management, it's going to leave the company with a $1 billion loss. Compared to that, St. Joe's reported $0.03 per-share loss in Q3 doesn't sound so bad ... but it was bad enough to have St. Joe dragging the bottom of the Florida swamp. And I'll bet it's at least part of the reason CAPS members give Joe -- and Sony and Dendreon along with it -- only two stars out of a possible five.

In contrast, investors seem pretty optimistic about Bio-Reference Labs and DigitalGlobe, recipients of four and five CAPS stars, respectively. Of the two, DigitalGlobe is clearly the CAPS favorite. But when I look at the stock, I find it hard to see beyond the massive earnings miss of last week, and the even more eye-popping stock price -- 609 times earnings! Between that crazy valuation and the fact that at last report DigitalGlobe was burning cash rather than earning it, I'm much more enthused by this week's four-star option than five-starred DigitalGlobe. That's why today, we'll be looking closely at ...

The bull case for Bio-Reference Labs
In direct contrast to DigitalGlobe's triple-digit P/E ratio, Fools point out that Bio-Reference has an exceptionally low price. CAPS member Winnerfrommidlan points out that at just 13 times earnings, Bio-Reference has a "low PEG for 20% Growth."

Of course, anyone can read numbers. That's why it's so good to hear from CAPS member debster863, who gives us a firsthand look at the company:

I work in Healthcare, this lab has just come into our organization, we currently use [LabCorp] [(NYSE: LH)] and [Q]uest [(NYSE: DGX)]. I started researching bio-referance and it seems a strong company. lots of positives (growth, gendx, cancer research etc).

ICTOptimist agrees. Bio-Reference has "favorable demographics," and in contrast to LabCorp and Quest, it's a "smaller company than industry's largest with better growth or acquisition prospects."

And yes, at just $450 million in market cap, I think it's a given that this company is more likely to be acquired by Quest or LabCorp than the reverse. But should you buy it?

Well, let's see here. At 13 times earnings, Bio-Reference sells for about a 20% discount to LabCorp's P/E, and a 33% markdown from Quest's valuation. Yet with predicted growth rates for the next five years hovering around 18% or more, Bio-Reference looks to be growing 50% faster than its bigger brethren.

Foolish takeaway
While not a slam dunk (I note that Bio-Reference's free cash flow has been weak in recent quarters), the twin facts of a lower-than-average P/E and a faster-than-average growth rate both argue strongly in favor of buying Bio-Reference today. Seems to me we've found our bounce candidate for the week.

What's that, Fool? You say you've never heard of Bio-Reference Labs? That's not necessarily a bad thing, you know. Some of the best stocks in the world are tiny companies you've never heard of. Read about two more of our favorites in the Fool's new -- and free! -- report: "Too Small to Fail: Two Small Caps the Government Won't Let Go Broke."