Get Ready for the Bounce

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"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 Nasdaq.com:

Stock	52-Week High	Currently Fetching	CAPS Rating (out of 5)
Carter's (NYSE: CRI)	$29.00	$17.21	****
RF Micro (Nasdaq: RFMD)	$8.60	$3.73	***
Broadcom  (Nasdaq: BRCM)	$43.07	$22.97	***
Tiffany (NYSE: TIF)	$57.34	$35.80	***
American Express (NYSE: AXP)	$65.89	$44.00	***
Riverbed Tech (Nasdaq: RVBD)	$52.81	$21.92	***
Oplink Communications  (Nasdaq: OPLK)	$21.06	$11.18	***

Companies are selected from the "NASDAQ 52-Week Low" list published on Nasdaq.com on the Saturday following close of trading last week. 52-week-high and current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Knives and knaves
Mr. Market, continuing to sink into a midwinter depression last week, sold off good, bad, and ugly stocks right and left. But as bad as things looked up on Wall Street, investors don't seem overly concerned down here on Main Street. The folks on CAPS view every company on today's list with equanimity and give a mid-range three-star rating to each -- with one exception: Motley Fool Inside Value recommendation Carter's. That one, investors still see as above average. Let's find out why, as we delve into ...

The bull case for Carter's

• We'll lead off with DCFalcon, who writes, "Cashing in on the baby business, Carter's is well positioned to become a more dominant player in the [children's] clothing business, which does not currently have a dominant company."
• How does a company get "more" dominant? Finding new markets might offer one means to the end. SteveCFinAdv suggests: "With the growing baby boomer generation, now grandparents, spending all of their excess cash on their cute little grandkids, I think that this stock is going to reap the benefits. The clothes are good quality and babies go through at least 2 outfits a day."
• And we'll end with a personal note from CAPS All-Star dymaxian, who calls Carter's one of the "most respected baby clothing brands. Being a new father, this is an obvious pick for me, right along with Johnson & Johnson and Procter & Gamble. I see those three names in every room in my house. You don't stop buying baby stuff in a down market."

Now, it's important to bear in mind that Carter's has struggled lately. (Inside Value rarely taps a company that's firing on all cylinders for its recommendations.) Thanks to a $155 million writedown to its assets in Q2, the company currently has a negative price-to-earnings ratio. Even worse, that number could deteriorate in the future, as Carter's inventories have continued to rise more quickly than sales in the past few years.

The tying up of cash flow in the form of unsold inventories isn't doing Carter's free cash flow any good, either. Carter's stock trades at a lofty multiple of 37 times free cash flow. Add in Carter's $350 million in net debt as the economy heads into recession, and you have to wonder whether Carter's is an accident waiting to happen.

Despite the bad news, I recently had the opportunity to discuss this situation with Carter's management and am confident that it fully recognizes the problems and intends to fix them. To my mind, that makes Carter's a real turnaround prospect over time. I'm just uncertain how long the bounce will be in coming.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Carter's -- or even what other CAPS players are saying. We also want to hear your thoughts. Will the looming recession derail Carter's turnaround plans, or can management clean up this mess regardless? Click on over to Motley Fool CAPS and tell us what you think.

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