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 170,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.

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:

Companies

How far from 52-week high?

Recent Price

CAPS Rating (out of 5)

Illumina (Nasdaq: ILMN  ) -50% $39.54 *****
Dendreon (Nasdaq: DNDN  ) -85% $6.31 ***
Tempur Pedic (NYSE: TPX  ) -71% $25.54 ****
Select Comfort (Nasdaq: SCSS  ) -35% $23.01 **
Zillow (Nasdaq: Z  ) -44% $33.86 *

Companies are selected by screening on finviz.com for abrupt 5% or greater price drops last week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
With the Dow Jones Industrial Average rebounding to gain 3.6%, Friday wrapped up Wall Street's strongest weekly performance so far this year -- but not all investors were so lucky. Up above, you see five stocks that ran against traffic, going down when everyone else was going up. So what went wrong?

In some cases, the answer isn't clear. Zillow shares, for example, have been sliding all month long, and saw no letup to the selling last week. (Could it be that someone, somewhere, has realized that 325 times earnings is a bit much to be paying for the stock?)

In other cases, though, it is clear. Painfully so. Take mattress makers Tempur-Pedic and Select Comfort, for example. Tempur warned investors Wednesday that its sales weren't going to be up to snuff, and profits would be down by half in the current quarter, against year-ago levels. That sparked a simply savage sell-off in the stock, and did archrival Select Comfort no favors either. Investors are betting that what's bad news for the one mattress maker is almost certainly bad news for the other, and Select Comfort shares are off 12.5% on the week.

Meanwhile, at Dendreon, worries over the success of Johnson & Johnson's new Zytiga prostate cancer treatment continue to plague the stock, which continues to bounce around at near-52-week-low levels. Little wonder, therefore, that investors on CAPS are awarding all these stocks mediocre ratings of anywhere from one to three CAPS stars. But what about the outlier? Could five-starred Illumina be the light that leads us out of the darkness? Let's find out, as we examine...

The bull case for Illumina
Illumina, for those not familiar with the company, makes equipment used in the sequencing of genomes. Swiss biotech giant Roche tried to buy the company a few months ago, before balking at the price tag, and CAPS member wsucougs believes this could be "the next big thing" in medical science.

jpriley47 expects Illumina to "profit greatly from increased interest in genomic mapping for various diseases and looking at protein interactions with the genome." And All-Star CAPS investor RMITRA757 agrees: "Next generation sequencing is changing the field of Genetics. Look for the technology to move from the research market to the clinical market in the next 2-5 years. This will led to 20%+ growth of the market for many years. Illumina is the clear leader in the field, good margins, good earnings growth."

All of which sounds pretty good so far ... but what about the price? After all, if Illumina was too expensive for Roche, does this mean it's too expensive for you and me to want to buy as well?

Not necessarily. For one thing, Illumina has gotten quite a bit cheaper since Roche ended its bid for the company. Sure, at 60 times earnings today, it still looks expensive. But when you consider that Illumina generates far more free cash flow (about $256 million over the past year) than it reports as net income, then the stock's 19x price-to-free cash flow ratio actually doesn't look unreasonable.

Foolish takeaway
Ideally, I'd like to see Illumina's stock price fall a bit more, or its earnings growth rate tick up from the 17% annual pace Wall Street is projecting, before officially "recommending" the stock. For the time being, Illumina looks to me like a stock that's fairly priced, no more and no less. But if it should take another jog down for no particular reason, then yes, I think this one does have the potential to bounce.

What's more, as one of the medical device companies subject to extra taxation under the current administration, there's also a chance for Illumina to bounce based on the results of the upcoming presidential election. Find out why -- and find out who else might benefit from a change of administration -- in the Fool's new report: These Stocks Could Skyrocket After the 2012 Presidential Election.

Fool contributor Rich Smith does not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 324 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Zillow, Tempur Pedic International, Johnson & Johnson, and Dendreon. Motley Fool newsletter services have recommended buying shares of Zillow, Illumina, Select Comfort, and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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