"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 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:
The week in weak stocks
A weak jobs report helped subtract 1% from the Dow Jones Industrial Average Friday, erasing gains made earlier, and ending the holiday-shortened week with a loss. Well more than 1,000 stocks lost value by week's end, and while mercifully few of them actually hit 52-week lows, a few dozen did plumb new depths, including each of the stocks named above. So what went wrong?
In some cases, the answer was obvious. For example, you may have heard that a certain company whose name rhymes with "Snapple" came out with a new mini iPad model. Not everyone's in favor of the idea, but many investors took it as one more nail plunked into the coffins of mobile computing rivals Research In Motion
Nor was there much mystery behind Walter Energy's Friday plunge. S&P just cut its outlook for the company's $2.4 billion debt load to "negative" from "stable." With the debt already rated a less-than-optimistic "BB-," things aren't looking good for Walter these days.
In other instances, your guess is about as good as anyone else's on Wall Street's as to why the stock went down. NII Holdings -- aka "Nextel in South America" -- lost 5.5% Friday for no reason in particular.
Will Riverbed sink or swim?
One of the companies falling into the "easily explained sell-off" category last week was Riverbed. Early in the week, analysts at ThinkEquity cut 20% off their price target for the stock. Later on, peer networking stock Acme Packet added a bit of injury to ThinkEquity's insult when it issued an earnings warning that cost it 14% of its market cap -- and subtracted a good 7% from Riverbed as collateral damage.
Was the sell-off at Riverbed justified? Perhaps not. CAPS member RSue argues that "network optimization is becoming increasingly important with exponentially growing traffic on wide-area web networks -- with respect to speed, efficiency and cost savings. Riverbed is a leader in the field and has a raving fan base."
A fact that CAPS All-Star actuary99 is quick to confirm: "My IT department deals with this company [and] thinks they're a good company."
Even the Fool's own TMFZahrim says, "There are so many megatrends driving demand for high-speed networking today that Riverbed really can't lose."
And then, of course, there's the price. With $178 million in positive free cash flow (three times what Acme made last year, by the way), Riverbed sells for a market cap of just $2.4 billion. That's only 13.5 times annual free cash flow, for a firm that most analysts agree will keep growing its profits at upward of 21% per year (again, this is quite a bit faster than Acme) for at least the next five years.
Fools, that's cheap. Riverbed may not be the absolute best bargain (indeed, if you ask some of our analysts, they'll tell you there's a completely different tech IPO you should be buying). But to my Foolish eye, 13.5 times FCF is a very nice price to be paying for 21% long-term growth. That's why I've personally, and publicly, recommended buying Riverbed in my CAPS account. That's why I think the stock just has to bounce -- sooner or later, and probably sooner than later.