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:

Company

 

52-Week High

Recent Price

CAPS Rating

(out of 5)

Partner Communications (Nasdaq: PTNR  ) $20.71 $7.61 *****
Frontier Communications (Nasdaq: FTR  ) $9.55 $4.31 ***
Inergy (NYSE: NRGY  ) $42.75 $17.33 ***
Quad/Graphics (NYSE: QUAD  ) $45.35 $11.80 **

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
2012 started out with a bang for stock investors, as the Dow Jones Industrial Average quickly tacked 500 points onto its final price of 2011. But last week, gravity reasserted itself. The venerable index posted its first "down week" of the new year -- and some stocks fared much worse. Above, you see a quartet of stocks that hit 52-week lows last week. Can they bounce back?

In the case of this week's worst-ranked stock, maybe we shouldn't want it to. After all, just this past summer, Quad/Graphics management announced a plan to spend $100 million repurchasing its own shares. If Quad thought its shares were such a bargain back then, when they were selling for $20.19 per share, it must think the shares are an absolute steal today, at the low, low price of $11 and change.

Speaking of low prices: Inergy. I warned investors away from this propane distributor back in July, pointing to the company's low growth rate and high price. Today, the stock costs less than half what it cost back then. Much of the decline came in a single day, when Inergy announced last week that it may cut its dividend in response to weak propane demand and weaker cash flow this winter. The weather won't stay warm forever, of course, and I imagine business will improve eventually. Still, Inergy has never been a particularly strong cash producer. I think I've got to agree with the CAPS majority on this one: There are still better bargains than Inergy.

Finally, topping our list this week, we see a pair of telcos. Three-star-rated Frontier Communications got kicked over the cliff edge last week when S&P cut its outlook on the rural telecom provider's debt. What this means, basically, is that there's a good chance the credit rater will lower Frontier's rating below its already junk level of BB. That would raise interest costs on Frontier's $8.2 billion debt load, hurting profits and imperiling the dividend. Not good.

The bull case for Partner Communications
But what about that other telecom -- Partner, was it? On the one hand, this four-star-rated stock carries a much lighter debt load than Frontier: just $1.2 billion net of debt. On the other, it's located in a dicier neighborhood than Connecticut-based Frontier: Israel. CAPS member SureShoe points out that Partner's "dividend yield is higher than its P/E," but aside from "liquidity and Israel stability concerns, not sure why this stock is so cheap."

billybob4148 thinks Partner has "good growth potential," and also likes the "nice dividend." Meanwhile, All-Star CAPS member mrindependent observes that stocks like Partner, which offer "low pe/roe ratios and "the lowest possible forward pe ratios," tend to outperform the S&P 500 "by 20% or more based on backtests over the last decade."

A bounce candidate in the making?
Pretty impressive, if true. On the other hand, over the past 12 months Partner has actually underperformed the market by an even more spectacular number -- 62%. What's to say this stock is poised for a turnaround?

In a word: price. At a P/E of just five times trailing earnings, and selling for less than two times next year's projected profit, Partner Communications is simply too cheap not to outperform. As far as liquidity concerns go, this No. 2 mobile provider in Israel carries a slightly smaller debt load than No. 1 rival Cellcom Israel (NYSE: CEL  ) . But it generates so much cash (about 40% more than reported income) that it could pay off its entire debt in about four years if it was of a mind to. (Cellcom is no slouch in the cash department, either. It actually generates 50% more cash than its reported net income.)

Meanwhile, while investors wait for the turnaround to come, Partner pays them a generous dividend for their patience -- about 12.6% on a trailing basis, according to S&P Capital IQ. Bounce or no bounce, Partner looks like a good bet to me.

Do you like cheap stocks? Do you like big dividends even better? Then read our new report -- for free!: "13 High-Yielding Stocks to Buy Today."

Motley Fool newsletter services have recommended buying shares of Cellcom Israel, but 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. 330 out of more than 180,000 members. The Fool has a disclosure policy.

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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