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 Nasdaq.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, 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 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 40% and 80% of its value over the past year, and currently sits at or near its five-year low. Wall Street's left 'em for dead. But down here on Main Street, we think several of these companies have real potential.

Topping our list this week is United Rentals, a company that gained fame in 2007 when it became one of the first casualties of the credit crisis, abandoned at the altar by erstwhile suitor Cerberus. But should you rush in where Cerberus now fears to tread?

Let's find out.

The bull case for United Rentals

• Inspired by the sell-off that followed Cerberus' retreat, CAPS member apacheen began digging into United Rentals' financials, and liked what was there. Writing in December 2007: "Stock has been hammered through the failed buyout by Cerberus, even though the company just finished it strongest ever quarter. The company has begun many initiatives to increase profitability and decrease costs while refocusing on its core business."
• And just what would that core business be? Gallo6 clued us in last September: "I love this company. I first was tipped by my colleges construction and the equipment being used. Along with Bobcats, about every machine being used is rented through United Rentals." (United Rentals doesn't stock big-screen TVs for apartments; but if you're looking for some heavy-construction equipment from Deere (NYSE:DE), Honda (NYSE:HMC), or Terex (NYSE:TEX), you're in luck.)
• millrat33 wrote last June that buyers of the stock at the prices back then would feel pretty lucky down the road: "United is a good company in a good business. The $34.50 buyout price that was offered by Cerberus is a reasonable target price for 2010."

Ahem. Of course, millrat33 made that optimistic prognosis nine months ago, when the stock -- and the stock market -- were both a heckuvalot healthier than they look today. Times, as the saying goes, have changed, and I seriously doubt we'll see anything like the 750% price appreciation necessary to take this $4 dollar stock up to a $34.50 stock in 12 months' time.

That said, close examination of the firm's cash flow statement suggests that United Rentals is approaching a point at which it will be hard to call the stock anything other than cheap. After three years in which the firm spent more on capital purchases than it collected in cash from operations, United Rentals pared back its spending last year, and turned the corner on free cash flow. What's more, if you credit the firm for sales of capital equipment that it no longer needs, it arguably generated as much as $335 million in free cash flow in 2008.

Not bad for a firm that reported "losing" $700 million for the year (as GAAP defines such things). Valued on the more generous standard of free cash flow given above, United Rentals appears to be selling for just over 10 time cash profits. Considering that most analysts on Wall Street expect the firm to grow those profits at 8% or so per year over the next five years, the stock's arguably within spitting distance of value territory.

Time to chime in
Of course, that's just my opinion. And I admit that if the current recession lasts longer, or goes deeper, than I expect it to, United Rentals' recovery could be a long time in coming. On the other hand, if the Obama administration's stimulus plan works as promised, United Rentals' construction equipment rental business could absolutely boom.

Which scenario is more likely? That's what we want to hear from you. Click on over to Motley Fool CAPS now, and let us know your thoughts.