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 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:

Company

 

52-Week High

Recent Price

CAPS Rating
(out of 5)

Riverbed Technology (Nasdaq: RVBD  ) $41.83 $14.95 *****
Walter Energy (NYSE: WLT  ) $131.44 $41.12 ****
NII Holdings (Nasdaq: NIHD  ) $44.00 $9.41 ***
Nokia (NYSE: NOK  ) $6.83 $1.92 **

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
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 (Nasdaq: RIMM  ) and Nokia. RIM had been falling all week before bouncing back Friday on no news whatsoever. Dead-cat bounce, anyone? Simultaneously, Nokia hit a new 52-week low on the iPad news, exacerbated by reports that the company's new Lumia line of smartphones may be too pricey to compete for sales in China.

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.

Foolish takeaway
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.

Fool contributor Rich Smith owns shares of Nokia. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 359 out of more than 180,000 members. The Fool has a disclosure policy.

The Motley Fool owns shares of Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Walter Energy, Riverbed Technology, and Acme Packet. Motley Fool newsletter services have recommended creating a stock position in Riverbed Technology.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 09, 2012, at 12:00 PM, techy46 wrote:

    It all depends on these companies performance in the next 3-4 quarters.

  • Report this Comment On July 09, 2012, at 6:50 PM, spirts wrote:

    They will have moved off their bottoms before the earnings. You can count on that.

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