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" 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 just know that some of these babies are gonna bounce right back once the suds subside.

Last week, we saw that thesis come to fruition, as a heavily pummeled market bounced back with abandon. It was like some giant hand had reached down, scooped up a kindergarten classroom, and shook it out over a trampoline -- bouncing babies all over the dang place. But with the Dow up almost 10% for the week, the question must be asked: Is there any bounce-ability left in this market?

Fools think so. And they think Molson Coors Brewing is just the stock to prove it. Here's why:

The bull case for Molson Coors Brewing 
CAPS All-Star jyc3 kept the bull thesis on this one short and sweet back in December: "Low P/E, high cash flow, low debt, recession resistant business."

Thinking along the same lines, bobbyabull muses: "If they earn $3.60 a share for 2009 (Yahoo! finance) and you assume the multiple gets up to 16x at some point (reasonable for a defensive stock like this-alcoholics don't care if we're in a recession) you end up with a price target of $58." Sudsy numbers, but note that Yahoo! cites $3.60 in earnings for 2010.

Winding up our pitches with a bullish blast from the front, oregonrogue tells us: 

I can't drink Coors in Baghdad, But I can buy Coors stock! Defensive purchase. Gotta 12 pack waiting at home! God Bless the USA!

(And Canada, presumably. Molson Coors, you know.)

Of course, most of these pitches are a few weeks out of date, so let's run a few up-to-the-minute numbers on the stock. Right now, Molson Coors sells for a P/E of roughly 15 -- a bit cheaper than the price at which it attracted most of these investors. On the other hand, a lower price naturally pushes the yield up; the stock now yields about 2.5%. But are these numbers good enough to justify a purchase?

I vote "no," and for three reasons: First and foremost, the 15 P/E just doesn't look that attractive to me, what with most analysts positing only 10% annual earnings growth for the next five years.

Secondly, the valuation picture gets fuzzier when you notice that Molson's GAAP profit overstates this company's true free cash flow by a considerable margin. You see, while Molson reported earning $388 million last year, it in fact generated only $181 million in actual free cash flow. That's less free cash flow than it generated in 2007, and far less than in 2006 -- years in which, as you may recall, we were not in a recession.

Which brings me to my third and final point: A lot of investors will tell you -- indeed, as you can read above, do tell you -- that beer is a defensive stock, because people will drink in good times and bad. That's true.

But here's another truism to consider. In good times, governments tax "sin" -- tobacco, liquor, beer, and similar goods. In bad times, governments tax 'em even more, as they seek to accomplish the improbable: raising revenue without raising "taxes." Already this year, Congress has passed a massive tax increase on one category of sin -- cigarettes  -- which did immediate damage to Altria (NYSE:MO) and Reynolds American (NYSE:RAI), among others. Call me a cynic, but if I were a shareholder in Molson Coors (or Diageo (NYSE:DEO) or Boston Beer (NYSE:SAM)) I'd be on the lookout for similar tax increases on alcohol at the state level in the near future. I'd also start worrying about how that will slow a growth rate that appears already too low to support the share price.

Time to chime in
Like I said, I'm a cynic -- and a cheapskate to boot. Just because I think Molson Coors is too expensive to own doesn't mean you need to agree with me. (Actually, that would be no fun at all.)

Instead, let's argue this one out. Drop by Motley Fool CAPS and explain why you disagree with me, and think that my more bullish CAPS cohorts have it right. Someone's got it right here. Maybe you can tell us who it is.