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."

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 MSN.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And out the other end comes a list of stocks that 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, maybe a stock that's fallen even further, and 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:

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 65% and 85% of its value over the past year alone -- knocked flat by this year's economic whirlwind. And yet Foolish investors view the carnage with aplomb. With the sole exception of JDS Uniphase (a returning "champion" from last week's Bounce column), CAPS members give these stocks pretty decent marks. Why, we even have a pair of four-star stocks on the list.

Choosing between the two, I like the looks of LECG Corp. better than Alumina -- the balance sheet is shinier, and LECG just took the (final?) swan dive of its five-year swoon, dropping 20% in 24 hours on no news of any note. Is this the prebounce capitulation we've been waiting for? Let's find out. CAPS member 

The bull case for LECG Corp

• CAPS member gameguru introduced us to LECG last year: "The company is essentially a collection of academic, former government, and industry notables who provide independent consulting services across a spectrum of business, regulatory, and litigation issues. ... The advantages that LECG carries are a reputation of being supremely smart and fiercely independent. ... With offices across Europe, in Argentina, Mexico, Chile, Australia and New Zealand, the company shows evidence of international diversification and expansion." Within its highly defined niches, LECG competes with larger diversified companies such as Accenture (NYSE:ACN) and Gartner (NYSE:IT).
  
• noahsnyder gave us an inside look into this kind of company back in 2006: "I worked at one of these such firms in Chicago and I am familiar with the general principles behind how they run their operations. I can assure you one thing if you invest in this company -- the money will be managed wisely. These are some of the finest financials minds on earth and their advice is sought when giant companies find themselves involved in legal battles for giant sums of money."
  
• Even the Fool's own TMFPlatoish thinks LECG is Ph.D. material. In a pitch also dating from 2006: "This is a very interesting company with a very progressive management philosophy. ... [To] maximize staff retention ... [they allow] their experts keep a higher percentage of billable costs and ... associates make most of the calls. They also like to snag small, quality private outfits and roll them into the company. I'm impressed enough to buy it in CAPS and continue my studies. Service organizations, if done right, can be cash flow machines."

Right off the bat, I should mention a couple of reservations about LECG. First, it's not exactly living up to our CAPS members' expectations. Second, the best "pitches" on this company, expressing these expectations, depend on data that's now several quarters out of date. So what does LECG look like today?

Well, sales are slipping, and profits plunging. But as a value proposition, the stock still looks pretty good to me. LECG has $12 million in the bank, and no long-term debt. It's generating about $6 million per year in free cash flow, so it has an EV/FCF ratio of about 15 -- not bad for a company that analysts expect to eventually resume growing, and to average 20% annual earnings growth over the next five years.

Time to chime in
Seems to me, LECG has the funds necessary to survive this downturn, and resume growth as analysts expect. Seems to me, the price offers a decent margin of safety on that premise. I'd consider buying here -- but Foolish minds can certainly differ. Got an opinion of your own? Then tell us what you think.

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