Drop-Dead Gorgeous Stocks

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"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."

So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And out the other end comes a list of stocks which have fallen so far, that Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even further, for even longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that just hit their five-year lows:

Company	Recent Price	CAPS Rating (5 max):
Silicon Motion  (Nasdaq: SIMO)	$3.47	*****
Star Bulk Carriers (Nasdaq: SBLK)	$3.90	****
NovaGold Resources  (NYSE: NG)	$3.24	****
IAMGOLD  (NYSE: IAG)	$3.07	***
Boyd Gaming	$5.22	**

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?
With the exception of Star Bulk Carriers (which somehow made the cut for MSN's "5-year low" list despite having been public less than 52 weeks), each of the stocks listed above has shed between 65% and 90% of its value over the past year. Wall Street has left 'em all for dead, but on Main Street, their popularity runs the gamut from loathed (Boyd Gaming) to loved (Silicon Motion).

Clearly, we're going to be most interested in the stocks that Fools like best. Top honors today go to "fabless" semiconductor company Silicon Motion. So let's jump right in and examine ...

The bull case for Silicon Motion

• CAPS All-Star mm20001 introduced us to the company in early September: "Silicon Motion Technology Corp. is a Taiwanese designer of digital media storage and mobile multimedia solutions for MP3 players, DSCs, mobile phones, etc. The stock is down ... mostly due to modest drops in revenue quarter-over-quarter from Q4 2007 to Q2 2008, significant drops in earnings over the same time, and lowered guidance for the rest of 2008."
• So why should we expect it to go back up? For one thing, MENGIV argues, "They have the number one market position in Korea and are moving into China and Europe."
• For another, as miamidenizen pointed out in July: "Earnings have grown 56% per annum over the past five years, and are expected to grow 25% per annum over the next five years. Silicon Motion has almost no debt and greatly improving total cash flow from operating activities over the last several years."

Mind you, those numbers have wobbled a bit since miamidenizen cited them back in July, and the company has only been public since 2005. I don't exactly trust pre-public figures for Taiwanese tech companies, so we'll go with the more up-to-date figures in our analysis. Since its IPO in mid-2005, earnings have grown 36% annually. This number has been hurt by the most recent quarter, which saw earnings decline by 75% year over year. Pessimistic analysts have shaved five points off their projections for the future as well -- long-term earnings growth is now posited at 20% per year.

Still, for a stock with a P/E of 4, that sounds awfully cheap. What's more, miamidenizen is right about the cash flow. While SiMo doesn't give us quarterly play-by-plays, its annual reports show dramatically improving free cash flow (FCF) in each of the past two fiscal years; $42 million in FCF last year, and as a result, slightly better FCF than the company reports as "earnings" under GAAP. In other words, as cheap as SiMo looks, it could actually be even cheaper.

Time to chime in
All that aside, there's no denying the fact that Mr. Market has little love for chip makers these days. Not only little SiMo, but also giants like Advanced Micro Devices (NYSE: AMD) and NVIDIA (Nasdaq: NVDA) are down at least 70% over the past year, and even mighty Intel (Nasdaq: INTC) is fighting a 40% swoon.

Now it's time for you to give us your take on all this pessimism. Is an investment in SiMo "dead" money? Or does the stock's swoon give us a gorgeous opportunity for profit? Click on over to Motley Fool CAPS and tell us what you think.

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