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

Five super falls -- one superball
What a week. Every day for the past five days, the Dow Jones Industrial Average has gone higher and higher. Four days in a row, we hit four new record, all-time highs. Yet despite all the good news, somehow, more than 1,700 separate stocks actually lost money last week. So what went wrong?

Beginning at the bottom of the list, we find a couple of obvious answers. Direxion Financial Bear 3X and Direxion Small Cap Bear 3X are, respectively, exchange-traded funds that bet heavily on financial stocks and small-cap stocks going down, rather than up. In theory, at least, every time these stocks-as-groups decline one point, the ETFs that bet against them gain three points. So you can imagine what happens when the stocks they're betting against, instead of declining in price, hit new all-time highs.

Less clear is the case against VirnetX Holding. Two weeks ago, the company won a big court victory  in its patent suit against Apple. The prospect of being able to collect on its $368 million jury verdict should be good news for VirnetX. On the other hand, though, investors may be starting to wonder: Even assuming the company gets to collect its $368 million, what is there to justify the remaining $1.36 billion worth of this profitless, revenue-less company's market cap? (And if the answer turns out to be "nothing," then why would you want to own it at this price?)

Next up: Atlantic Power. This one looked more like a Power-outage last week, when its Q4 earnings report featured a big revenue miss, "dismal" earnings, and a halving of the dividend. When a company's expected to earn only a nickel yet somehow manages to lose $0.45 a share instead, you can't expect investors to react well to that news -- and they didn't.

But enough of the bad news. For a change of pace, let's turn now to one stock that may offer a bit more hope for a bounceback. Let's review ...

The bull case for Liquidity Services
Liquidity Services took a bit of a pounding last week. It's down 26% already over the past 52 weeks, and then CNBC pundit Jim Cramer twisted the knife on his Mad Money TV show last week, blasting the company for cutting guidance and declaring that "management lacks credibility." That helped to send the stock down more 8% on the week. Regardless, a lot of folks still have faith in Liquidity Services.

CAPS member wjolliff for example, introduces us to Liquidity as "a Retailer for Surplus assets" and gives the tentative endorsement that "it seems safe enough in the short term." Long-term, All-Star CAPS player BoiseKen thinks the stock is selling for a "nice discount" and likes its position as a supplier to "the world of independent resellers."

CAPS' booneshinn sees "no serious competition" to the business.

Meanwhile, reeshau says: "as the weak recovery puts pressure on governments and businesses alike, LQDT's markets become more desirable to both buyers and sellers. This will continue to compound with the network effect of auction marketplaces, and drive growth."

And to be honest, I see a lot to like in Liquidity Services -- weak stock performance notwithstanding. Priced at 23 times earnings, the stock doesn't look expensive relative to expectations of 22.5% annualized earnings growth over the next five years. Factor in the company's $45 million cash hoard, and debt-free balance sheet, and the stock actually looks slightly undervalued.

Foolish final thought
My one concern about Liquidity Services is that over the past year, its free cash flow numbers have taken a turn for the worse. Historically a strong cash producer, last year, its free cash flow began to lag reported net income. The situation got worse in the most recent quarter, and as of today, Liquidity Services is currently generating only about $0.70 in real cash profit for every $1 it reports as net income. (Indeed, even simple operating cash flow is now less than reported net income.)

Granted, if all this turns out to be just a quarter- or two-long aberration, Liquidity Services could bounce back in a big way. For now, though, the trend doesn't look good.