"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 "New 52-Week Lows" list on WSJ.com:

Stock

52-Week High

Recent Price

CAPS Rating
(5 stars max)

Republic Services  (NYSE:RSG)

$36.52

$16.47

*****

Alcoa (NYSE:AA)

$44.77

$5.22

****

Elan Corp (NYSE:ELN)

$37.45

$5.00

****

Walt Disney  (NYSE:DIS)

$35.02

$15.83

****

Lockheed Martin  (NYSE:LMT)

$120.30

$58.85

****

Companies are selected from the "New 52-Week Lows" list published on WSJ.com on the Saturday following close of trading last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

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.

You could be forgiven for thinking that we here at The Motley Fool have opened up a take-all-comers adoption agency for  Mr. Market's bathtub rejects. Within our several portfolios, you can find such Fool-approved 52-week losers as Disney (a dual Motley Fool Inside Value-Motley Fool Stock Advisor recommendation), Elan (a Motley Fool Rule Breakers pick), and this week's top-rated stock in the mind of CAPS members: Motley Fool Income Investor selection Republic Services.

What sets Republic above all the rest? We're about to find out, as we execute a perfect 10-point Dumpster dive right into ...

The bull case for Republic Services
CAPS All-Star throwerw leads off for the bull pitchers with the enigmatic exclamation: "Bill Gates!" Allow me to clarify: throwerw refers to the Microsoft (NASDAQ:MSFT) chairman's recently reported 15% stake in Republic, made through his investment company "Cascade Investment." Gates is now officially the biggest shareholder in Republic, second only to Blackstone (NYSE:BX).

What's got Gates so interested in picking up other people's garbage? Did he miss the speed limit one time too many, and get sentenced to community service? We can only speculate, but I suspect EnigmaDude hit the nail on the head when he argued that Republic's primary attraction is its role as "a recession-proof pick."  

After all, as yet another CAPS All-Star -- hwyman64 -- points out: "Good times or bad the garbage has to go out!"

Fair warning: Pinch nose. Bad puns ahead.
But does Republic pass the smell test? Let's rummage through a few numbers.

Running a valuation on a recently merged company is always ... interesting. Thanks to its recent acquisition of Allied Waste, and financial data sites' difficulty in making sense of merged company financials, a lot of the data on Republic that's currently bouncing about the ether-sphere is inaccurate. Take, for example, the data on popular website Yahoo! Finance.

According to Yahoo!, Republic sports a $6.2 billion market cap, an enterprise value fully $1 billion less than that, $1.93 per share in expected fiscal 2009 profits, and about $324 million in trailing free cash flow. If correct, this would make for a pretty attractive 8.5 forward P/E, and an enterprise value-to-free cash flow (EV/FCF) ratio of roughly 16. But the truth is actually quite a bit different.

Start with the "price" of the company. Yahoo! gets the market cap right, but misses the fact that post-merger Republic now has $7.1 billion in net long-term debt -- thus a $13.9 billion enterprise value. When you factor Republic's latest guidance into the math, what you wind up with is:

  • A forward P/E of 15, based on Republic's promise of $1.10 to $1.15 per share this year.
  • A forward EV/FCF ratio of 21.

Time to chime in
From where I sit, and assuming analysts are correct in their prediction of 12.5% five-year growth for the company, neither of these two "earnings" multiples looks particularly attractive. But hey -- that's just my opinion. Maybe you have a different view?

If so, then here's your chance to set me straight. Crunch the numbers yourself, then click on over to Motley Fool CAPS and tell us why you do believe that Republic has finally hit bottom, and is ready to climb in '09.

Republic Services is a Motley Fool Income Investor selection. Walt Disney and Microsoft are both Inside Value recommendations, and Walt Disney is also a Stock Advisor pick. Elan is a Rule Breakers pick.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 480 out of more than 130,000 members. The Fool has a disclosure policy.