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."

That's the thesis of my weekly Fool.com column "Get Ready for the Bounce," where I filter Nasdaq.com's 52-week-lows list through the "wisdom of crowds" meter of 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.

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 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:

Company	Recent Price	CAPS Rating (5 max):
KapStone Paper and Packaging  (Nasdaq: KPPC)	$3.82	*****
OmniVision Technologies  (Nasdaq: OVTI)	$4.54	****
Southwest Airlines  (NYSE: LUV)	$7.30	***
Revlon  (NYSE: REV)	$6.06	**
Eastman Kodak  (NYSE: EK)	$6.41	*

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 45% and 75% of its value over the past year alone, and currently sits at or near its five-year low. Basically, Wall Street has left 'em all for dead.

Main Street, in contrast, is taking a more discriminating view. CAPS members may not be excited about Kodak's prospects in the digital era, and they're treating Revlon like an errant blob of smudged mascara. But plenty of Fools are looking at OmniVision's tumble with greed in their eye (and turning a deaf ear to fellow Fool Anders Bylund's warning, I might add.) And strangest of all, KapStone Paper seems to be developing a following of its own.

Now, investing in a papermaker in the middle of a recession may seem like a small-"f" fool's errand to some. From what I hear, Best Buy (NYSE: BBY) isn't moving as many cardboard boxes out the door as it might like this Christmas season. And when was the last time you saw a contractor loading up on cement at Home Depot (NYSE: HD) for a build job? (KapStone's products go into cardboard boxes and cement bags alike, and a few dozen other container items as well.) But let's suspend judgment for a moment, and listen to what our fellow investors have to say. Maybe there's something more to this buy thesis?

The bull case for KapStone Paper and Packaging 

• Stvmn tells us he first got interested in KapStone back in June of '07, upon seeing one Jonathan M. Glaser, a major holder of KapStone stock already, make a "$4,022,000 Insider buy." (Okay. But what have you done for us lately, Mr. Glaser?)
• More recently, EclecticRecluse gave KapStone the thumbs-up based on its: "Good Forward Earnings Estimate."
• But by far the best pitch on KapStone comes courtesy of ostatebeavs1, who stopped by a few months back to note the following: "While this sector as a whole has languished a bit Kapstone increased Q2 revenue over the same period last year by 13 percent and had net income increase by 139% in the same period. Mostly thanks to an acquisition that triples the size of the Company."

To me, that seems instructive, but perhaps not in the manner in which ostatebeavs1 intended. In making that acquisition, KapStone took on a boatload of debt -- debt that now dwarfs the firm's mere $110 million market cap by a factor of four.

In fairness, this isn't necessarily a dealbreaker. KapStone does have a few things going for it:

• Copious free cash flow, for one. ($28.5 million over the past year.)
• An apparently low valuation, for another. (The stock trades for a measly P/E of 5.)
• And like EclecticRecluse says, next year's numbers could be really strong -- consensus estimates call for 40% growth.

Unfortunately, that growth could trail off right quick. The same analysts predicting 40% growth next year think KapStone will be lucky to average 5% per year over the long term.

Time to chime in
Personally, I don't find 5% growth prospects very attractive. And while I respect the firm's cash-generating prowess, I can't help but notice that even if KapStone directed every spare penny towards debt repayment, it would take more than a decade at current levels to pay down its debt -- again, not a prospect I relish.

But that's just me. Clearly, a lot of people think KapStone is worth owning, debt or no debt. If you're one of them, perhaps you could spare a few minutes to tell us why?