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 Low" list at Nasdaq.com:

Knives and knaves
When stocks fall hard, a Fool's heart turns to bargain hunting -- and just look at some of the names crowding today's list of bottom-scrapers: Pulp magnate International Paper, tech star Sun, baddie-zapper TASER, and new-broker-on-the-block Investools! Famous names every one, yet surprisingly, these are not the stocks drawing investor acclaim this week.

Instead, our CAPS community believes you'll find your best value in the humdrum business of insuring and reinsuring property and casualty losses. What leads our Foolish throng to this conclusion? We're about to find out, as we delve into ...

The bull case for United America Indemnity

• UAI's business may center on compensating clients for losses, but as hvalenzuela pointed out last April, this business goes best when the clients keep quiet: "If there are no major catastrophes, these companies make free money."
• Catastrophe, schmacastrophe, replies CAPS All-Star NorthWestHuslter, who apparently pulled UAI from a stock screener back in October, jotting down the following notes at the time: "Pro ... The price-to-earnings multiple is lower than average for all stocks in the StockScouter universe. Positive ... A high-level executive purchased a large number of shares recently. Positive ... Previous day's closing price for [UAI] was slightly above its 50-day moving average." OK, NorthWestHuslter. Judging from your CAPS score, your thinking is working.
• Last March, All-Star mait77er called this stock: "very very undervalued. Also one Zacks highest rank stocks."

Seems the screen's the thing to catch the consciousness of these investing kings. But as for me, I don't know a lot about insurers. What I do know is that UAI has lost nearly half its market cap over the past year, leaving the stock priced at just 0.6 times its book value. Meanwhile, larger, better-known rivals, such as AIG (NYSE: AIG) and Markel (NYSE: MKL) sell for twice and nearly thrice that valuation, respectively.

I also know that the key statistic to focus on in evaluating an insurer is its "combined ratio:" the percentage of the premiums it collects that it pays out in claims and expenses (before counting its profits from investing those premiums). UAI's combined ratio of 88 matches Markel's ratio, and is better (because it's lower) than AIG's 90. What's more, UAI's ratio has held more or less constant for the past four years, which is more than you can say for either of its bigger rivals.

So while I don't know enough about UAI myself to say with conviction, "It shall bounce," the early indications sure look good.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about United America Indemnity -- or even what other CAPS players are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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. 742 out of more than 100,000 players. TASER is a Motley Fool Rule Breakers selection. The Fool has a disclosure policy.