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 furthest. 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:

Companies are selected from the "NASDAQ 52 Week Low" list published on Nasdaq.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
By close of trading for the week Thursday, no fewer than 267 listings on the NYSE hit their 52-week lows. That's roughly one out of every 10 securities trading on the Big Board. The Nasdaq was nearly as bad, with 214 new lows (so one stock in 14 has hit bottom).

It's a mess out there, no doubt. But 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 will bounce right back once the suds subside.

Case in point: Today's list is chock-full of standout, name-brand companies, but CAPS investors hardly give two figs (er, stars) for most of 'em. The sole exception is a company that's not name-brand -- but well-known to Motley Fool Stock Advisor members regardless: two-time Stock Advisor pick Healthways. To learn why we love it, all you need do is sign up for a free trial of the newsletter. But for now, let's find out why everyone else sees ...

A bull case for Healthways
NetscribeHealthC introduced us to this company last year:

Healthways provides ... disease management, complex case management and chronic care management to health plans, governments, employers, and hospitals in all 50 states, the District of Columbia, Puerto Rico and Guam. It offers programs that identify and provide care to individuals at high risk for incurring substantial health care costs in the near future. The company offers high-intensity services for more than 160 disease conditions. ... The specialized health services ... segment of the healthcare industry is a $4 billion opportunity which is only beginning to be ... tapped.

Writing last June, SureBeatsWorking saw Healthways as:

Playing to a demographic trend and providing specialized services for an unfortunate growing number of people with diabetes, heart ailments and kidney problems and a growing population. ... CEO Ben Leedle and chairman own a big chunk of the company. The board of directors [is] non-dilutive. I believe the company today has no meaningful direct competition. This gives it a first mover advantage and will provide it with some sort of moat.

(Note that both WebMD (NASDAQ:WBMD) and HealthSpring (NYSE:HS) claim to compete with Healthways.)

Even so, if Healthways is the first-mover, and playing to a demographic trend in a $4 billion market, what's the stock doing down at a 52-week low? CAPS All-Star ddberg explained earlier this year that:

The current issue related to the Medicare Health Support pilot program, which is driving the recent stock plunge.... [however,] they're investing capital in the program now to reap revenue benefits later. On top of that, international expansion -- a huge priority for the company -- is what justifies the high P/E.

Hold up a sec. Just how high is the P/E? Well, the silver lining behind a plunge in stock price is that Healthways' P/E has come down a bit -- far enough, in fact, that when weighed against analyst growth estimates of 22% per year, the stock now carries a PEG ratio of less than 1.0.

The bad news here (in my view) is the "investing capital" part of ddberg's pitch. Capital expenditures are way, way up over the past 12 months, with the result that free cash flow has come way, way down. Now, if ddberg and his fellow travelers are right, and this pays off big time for Healthways by enabling it to capitalize on a growing market, that's all well and good. In the meantime, though, we're looking at a stock selling for 36 times its free cash flow.

Seems a bit rich for me -- but hey, you pay your money and you take your chances.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Healthways -- 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.

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