Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) 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 where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Friday last week. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

These stocks may be scraping along the bottom of a 52-week trough, but they still have their fans. For all that it's been hurt by news stories of tainted Chinese milk, Synutra still attracts buyers like Nosidam100, who thrill at its prospects: "[Synutra] is one of the largest producers and distributors of infant and elderly dairy products. If 2.5 billion people in China reproduce at an annual growth rate of 1% then there will 68,493 babies born every day!" Talk about growth potential ...

"Potential" is the watchword at Celldex, as well, a tiny biotech that, according to TheStreetOutside, boasts an "extremely undervalued pipeline with gamechanging technology...biotech value at its best!"

However, with earnings absent or declining at all three companies, it's clear that exploiting a company's potential isn't quite as easy as recognizing it. Why, even the company on today's list that's most favored by CAPS members -- Chinese gaming house Giant Interactive -- posted a decline in earnings last quarter. And yet, while that's a disappointment, most Fools seem to agree that Giant's got something the other companies lack ...

The bull case for Giant Interactive
Skyshark29 thinks Giant's "awesome gaming engine developed in house should reduce overhead/increase profits."

CAPS All-Star hirshey agrees: "Online gaming is hot. There is no place with more potential than China. They crave innovation and the hip things."

And for investors like us, more interested in profit than thrill-seeking? Fellow All-Star Clint35 thinks Giant's got something to offer us as well: A "small cheap China stock already paying a dividend. Awsome!"

Awesome, indeed
Oh, I know not everyone is excited by Giant these days. Fellow Fool Rick Munarriz went so far as to suggest investors "wipe Giant from your memory" last month, comparing the company unfavorably to faster-growing rivals NetEase.com (Nasdaq: NTES), Shanda Interactive (Nasdaq: SNDA), and Perfect World (Nasdaq: PWRD).

And yet, the fact remains that these companies didn't do much better than Giant last quarter, as Shanda (in its March-ended quarter) and Perfect World posted double-digit profit-drops, while NetEase eked out a bare 4% rise in profit. A feat I'd bet NetEase wouldn't have managed had it not been in possession of Activision Blizzard's (Nasdaq: ATVI) license to kill with World of Warcraft.

Another fact that's difficult to ignore: Giant Interactive looks awfully cheap. More than half the company's market cap today is made up of cold, hard cash -- cash that despite the business downturn, keeps pouring through Giant's doors. And while the precise rate of flow is difficult to gauge, I estimate  free cash flow at about $95 million over the past 12-month period.

If I'm right about this rate, then what we're looking at here is an enterprise valued at roughly seven times its free cash flow, paying a 2.9% dividend, and predicted to grow at 8.6% per year once it gets itself turned around. So yes, business is on a decline right now. But these numbers tell me there's real potential in the stock.

Foolish takeaway
Admittedly, Giant's current management isn't executing well on that potential. But with a cheap stock price and more than 1.4 million "active paying accounts" on its books, I'm willing to bet that at some point, someone will see the value in Giant. Whether it's current management that gets its financial house in order, or an acquirer buying Giant at a premium, investors today should reap the rewards tomorrow.

Or so say I. But what we'd really like to know is what you think about Giant. Is there big value in this tiny gamer, or is it time to pull the plug? Click over to Motley Fool CAPS now, and tell us what you think.