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 180,000-member Motley Fool CAPS community, 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)

Dolby Laboratories (NYSE: DLB  ) (33%) $30.67 *****
Dendreon (Nasdaq: DNDN  ) (88%) $4.45 ***
MannKind (Nasdaq: MNKD  ) (45%) $2.16 ***
Arena Pharmaceuticals (Nasdaq: ARNA  ) (45%) $7.39 **
Molycorp (NYSE: MCP  ) (82%) $11.49 **

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops last week. Fifty-two-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
For four straight days, the Dow Jones Industrial Average plummeted last week, before a modestly positive jobs report on Friday pulled it out of its nosedive. Even so, the last-minute save wasn't enough to salvage the fortunes of all stocks. Nearly 3,300 companies ended the week lower than they went into it. More than 300 were decimated, losing 10% or more of their market cap, and these included all five of the stocks named above. So what went wrong?

Beginning at the bottom, rare-earth metals miner Molycorp lost more than a quarter of its market cap after reporting earnings Friday. Revenue was up modestly, but less than expected. Worse, the company's $0.71 per-share loss fell well short of the $0.03 profit analysts had told us to expect. Oops.

Speaking of earnings, Arena Pharmaceuticals is slated to report Thursday. If last week's trading was any indication of what the news might hold, it won't be good. The shares lost 22%. It's a similar story with MannKind, which reports its earnings today. Meanwhile, Dendreon earned its place atop the pile of weekly losers when it admitted that Q2 sales grew slower than expected -- $80 million instead of $85 million, a mere 66% increase. ("Only" 66%? Horrors!) The good news, though, is that based on last week's results, Dendreon's only $71.5 million in annual revenues away from making a profit. We hope.

So much for the two- and three-starred stocks on this list. What you really want to know about is the stock that everyone thinks will do well, right? Well, you're in luck. Now we turn to our five-starred nominee.

The bull case for Dolby Laboratories
Like everyone else on this list, Dolby shares got crushed last week. The reason? Pretty straightforward: Dolby missed estimates on both the top and bottom lines. And yet, my reaction to the stock's 14% drop in share price probably isn't what you'd expect it to be. Today, I like Dolby more than ever.

Why? Well first and most obviously, because the stock is a heckuvalot cheaper today than it was just a week ago. At 12 times earnings, and less than 10 times free cash flow, the stock's a steal of a deal if Dolby comes anywhere close to meeting Wall Street's prediction of 14% long-term profits growth.

But there's a second reason to love Dolby as well: It didn't do what everyone seems to think it did. Sure, earnings were down for the quarter. Earnings for the past 12 months ($292 million) are lower compared to what the company was earning just six months ago ($309 million), too. But the more important number, free cash flow, shows that Dolby is actually generating about the same amount of free cash today as it was six months ago -- about $355 million. Even if my fellow Fool Anders Bylund is right, and the DVD is dying, Dolby's business of turning sound into rock-solid cash remains as strong as ever.

It's not just me saying this. All-Star CAPS investor Momentum21 agrees that Dolby's "numbers are still solid" with a "low P/E, decent earnings forecasts and high ROIC."

CAPS member pchop123 points to Dolby's "lack of debt" as another reason to buy.

Going forward, CAPS member mdcombs believes that "Dolby's business model allows them to convert revenue to net profits very efficiency. This in turn creates cash flow to fund their business properly."

To recap: Cheap price. No debt. Decent earnings. Efficient production of cash. There are four good reasons to expect Dolby to bounce back from its big drop.

Investors who can stomach share price volatility such as Dolby's might also be comfortable investing in the uber-volatile biotech company Arena Pharmaceuticals. The company just received FDA approval for a potential blockbuster anti-obesity drug, and our top biotech analyst has a premium report detailing everything you need to know about the company. Claim your copy, which comes with a full year of updates, by clicking here now.

Fool contributor Rich Smith owns shares of Dolby Laboratories, but he holds no other position in any company mentioned. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 311 out of more than 180,000 members.

The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Dolby Laboratories. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that
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Read/Post Comments (2) | Recommend This Article (9)

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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 August 07, 2012, at 4:06 PM, stockdissector wrote:

    It's cash stash should help pull it through any slump.

  • Report this Comment On August 07, 2012, at 11:03 PM, Certainlyafools wrote:

    Well, I bought on recommendation about two years ago, it is a 50% loss, same time I bought two fool mutuials. They may have gotten great morning star rating but have not produced.

    Less than loving my advice...

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