Drop-Dead Gorgeous Stocks

"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 the thesis of my weekly Fool.com column "Get Ready for the Bounce," where I run MSN's 52-week-lows list through the "wisdom of crowds" meter that we call Motley Fool CAPS. The result: a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.

If a stock that's dropped for one year straight has headroom, then maybe a stock that's fallen even farther, for longer, has room to soar back even higher. In that 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:

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?
Each of the stocks listed above has shed between 55% and 80% of its value over the past year alone, suddenly swamped by this year's economic flash flood. But at least one of the five has been through all this before. The top-rated stock of the bunch, ModusLink Global Solutions, used to be a poster child of the Great Internet Bubble of '01.

Never heard of ModusLink? You may know it under another name. Once upon a time, ModusLink, then known as "CMGI," rode as the fourth member of the "Four Horsemen of the Nasdaq", alongside Amazon.com (NASDAQ:AMZN), Yahoo! (NASDAQ:YHOO), and eBay (NASDAQ:EBAY). Today, this erstwhile "Internet incubator" earns its keep as a mere supply-chain manager. But while its business model may not sound as sexy, a lot of Fools still think the stock's attractive. Let's find out why.

The bull case for ModusLink Global Solutions
CAPS member digitaldad1 took a look at ModusLink earlier this year, and came away with the following impressions:

a speculative venture capitalist company that now focuses on distribution and leading provider of global supply chain management solutions, announced recently it has signed a multi-year contract with Toshiba Electronics Europe (Toshiba) to manage the company’s European supply chain for a variety of its storage products. ... This [company] also moved into India with a putrchase last year of another supply chain company. I say this company has a great future.

What's that? CMGI -- er, ModusLink -- is still in the biz-incubating biz? Apparently so. As GreyRanger explained in May:

CMGI has quietly re-invented itself. They are actually 2 companies - a B2B supply chain services company and @ventures, a technology incubator concentrating in alternative energy investments. The B2B side keeps the $ rolling in steadily and profitably while the incubator is where I believe this stock will catch fire.

But to reverse an old truism, "the more things stay the same, the more they change." Writing in March, studmufinn argued:

CMGI is now a completely different company then it was just 5 years ago. Margins are increasing every quarter. Cash on hand is over 1/4 of a billion dollars. No debt. Stock buyback is in progress.

A long, hard look in the mirror
Interestingly, ModusLink was conducting that buyback at a $10-plus level. Today, you've got a chance to buy the same stock for nearly one-third the price. But should you take it?

Maybe yes, maybe no. On the plus side, while the market cap here sits north of $200 million, you'd only be paying about $40 million for the business itself. The rest of the company's valuation comprises cold, hard, cash on the balance sheet.

But on the minus side, while the business per se looks cheap, it probably deserves to be. ModusLink's margins recently took a turn for the worse, returns on capital are truly abysmal, and the company has burned through more than $30 million in cash over the past 12 months alone. Remember the "1/4 of a billion dollars" that caught studmuffin's eye back in March? Well, eight months later, it's down to barely $160 million.

Time to chime in
If you ask my opinion, I foresee the global recession eroding ModusLink's balance sheet faster and faster over time. Pretty soon, that fat cash cushion will look awfully thin -- and the business underneath is still a cold, hard slab.

Not a place I'd want to plop down my investing dollars, but Foolish minds can certainly differ. If you agree with our CAPS members, and disagree with me -- feel free! Click on over to Motley Fool CAPS, and tell us what you think.

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