"Don't catch a falling knife." Thus commandeth the old saw (to mix a cutlery metaphor).

But if people weren't tempted to catch cutlery in the first place, there'd be no need for this little bit of investing wisdom, would there? The idea of buying a former highflier at a discount price certainly has its attractions. The trick, of course, is to increase the odds that when you make your grab, you're catching haft, not blade. That's where we come in.

In The Motley Fool's continuing effort to keep your investing dollars safe, today we once again assume our position beneath Mr. Market's silverware drawer. As the knives plummet, we'll measure who has fallen farthest. Then we'll head over to Motley Fool CAPS and ask which of these stocks Foolish investors think are ready to rebound to new highs -- if any.

 

52-Week High

Recent Price

CAPS Rating

(5 max):

Smith & Nephew  (NYSE:SNN)

$69.20

$31.56

***

WNS Holdings

$20.00

$6.31

***

Hitachi

$77.33

$41.43

**

Palm Harbor Homes

$13.15

$4.61

*

Fortress Investment Group (NYSE:FIG)

$17.05

$1.15

*

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
Once again, our list proves the converse of the "everybody loves a winner" maxim. When a stock falls on hard times, its popularity evaporates right quick. And so it is that of the five companies named above, not one earns an above-average rating from CAPS investors.

In fact, the best we're offered today is a duo of three-star stocks -- companies that investors believe, on average, to be no better than average. But might one of these three-star stocks be a better bet than its rating suggests?

Searching for the rubber knife
Running the numbers, I've come to the conclusion that Smith & Nephew just might be a rubber knife -- fallen far, but with plenty of potential to bounce right back. Why? Well, as is our wont, let's start with a few thoughts from the CAPS community, beginning with ...

  • NetscribeMedDevs. This CAPS All-Star introduced us to Smith & Nephew (S&N) back in March of last year as a maker of "advanced medical devices for orthopedics, endoscopy, and wound management sectors worldwide. ... [and a seeker of] value enhancing acquisitions that relate to unique or additive technologies and products and ... improve its channels to market."
  • In July of this year, nbpt100 tagged S&N as a "good investment ... a conservative company with ... a strong and steady business but slow single digit growth. Their wound management business is a very slow grower ... The big growth is in the [orthopedics] area which should deliver double digit growth."
  • Jstaple7 agreed with this in February, and noted that S&N "has increased market share each year. They continue to pressure leading competitors Zimmer [NYSE: ZMH] and Stryker [NYSE: SYK] and are poised to overtake Zimmer in 2010. They have addressed their inventory concerns from 2006 and are continuing to implement full lean processes. The SAP conversion from previously outdated BPCS will only aid in the management of their inventories." And that's not all. Fact is, S&N competes with a whole row of medical device companies, from Medtronic (NYSE:MDT) all the way up to Johnson & Johnson (NYSE:JNJ) itself.

Earlier this month, we learned that S&N has also gained ground on Kinetic Concepts (NYSE:KCI) with the introduction of a wound dressing product. New products like these, when combined with expanding market share, lends support to analyst views that S&N will grow at 14% per year over the long term. But if that's true, then why do CAPS investors think S&N merits only three stars?

My guess: Because the stock isn't cheap. S&N sells for a modest 16 times earnings. Not expensive, to be sure, but no obvious bargain either.

And even worse news awaits us on the cash flow statement. There we learn that S&N generates significantly less free cash flow than it reports as net income; it has done so for at least the past five years. As of today, S&N's enterprise value is nearly 25 times its $283 million in trailing cash profits.

Time to chime in
To me, the stock looks overpriced and lacking the margin of safety I require -- but that's just me. You are certainly free to disagree, and if you do, we'd love to hear why. Come tell us what you think.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

The Fool owns shares of Stryker and Kinetic Concepts. Johnson & Johnson is a Motley Fool Income Investor recommendation.

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 ranked No. 895 out of more than 125,000 members. The Fool has a disclosure policy.