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 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, to measure 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 Low" list at Nasdaq.com:

Knives and knaves
If there's one good thing about a broad-based market sell-off, it's that you find a lot of terrific companies getting the ol' baby 'n' bathwater treatment. Tossed out on their rosy little bums as if they were bums of another sort. You know -- just know -- that some of these babies are gonna bounce right back once the suds subside.

This week, our list of companies hitting 52-week lows is once again chock-full of high-rated stocks. Two even get CAPS' best rating, a Foolish five stars: natural gas and electric utility Sempra Energy, and Chinese passenger-rail operator Guangshen Railway. I'm going to look at the former, Sempra. It may not be a household name, but investors who know it sure do love it. Let's find out why.

The bull case for Sempra Energy

• CAPS All-Star anontmp kept the buy thesis simple in August: "SRE is reasonably priced with a good yield. Energy will continue to be in high demand and drive SRE higher.
• PatrickMcG added a bit of color about the company, when he wrote in August that Sempra's "subsidary SDG&E is in fast-growing San Diego metro area. Current [price-to-earnings ratio] of 11. Respectable dividend ratio. ... US demand for natural gas will continue to increase [and] Sempra is positioning itself to be a primary distributor."
• So, we have a low P/E (11.9 as of this writing), decent growth potential, and a decent dividend with the potential for increases. So far, so good. Any other reasons to like the stock? Shfrtosd gives us an on-the-ground opinion about Sempra: "My local utility is a strong player in the [liquefied natural gas] field. Great dividend and well run."

Investors traditionally view utilities such as Sempra as safe ports in stormy markets. Customers need heat, light, and water, regardless of the state of the economy. This necessity lends confidence that dividends will remain intact and that even if growth is slow, at least contraction is unlikely. So there's good reason to think that utilities such as Sempra will perform well in the recession we seem to be in. But it's important to pick your utilities Foolishly and not just buy the first one that comes to mind.

In that regard, I'm just not impressed with Sempra. Could it bounce? Sure. The P/E's good and low, and the stock has been beaten up a lot worse than those of other utilities. But while you wait for a bounce to happen, owning Sempra means you're passing up better growth prospects and higher dividends at Dominion Resources (NYSE: D), PG&E (NYSE: PCG), or any number of other utilities. Much as I love the idea of "buying at the bottom" and riding the bounce back up, to this Fool's mind, there are better utility plays out there than Sempra.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Sempra Energy -- or even what other CAPS players are saying. We really want to hear your thoughts. Will Sempra raise its dividend to become more competitive with its peers? Are analysts underestimating the company's growth prospects? Click on over to Motley Fool CAPS, and tell us what you think.

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