Get Ready for the Bounce

"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's 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.

Five stars=highest possible CAPS rating, one star=lowest. Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Wednesday and Friday of last week. 52-week high and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"Everybody loves a winner"
So the saying goes, but this week brings us a "bounce" list chock-full of loser stocks... that are nonetheless getting a lot of love from CAPS investors. Each of the five names above touched a 52-week low last week; yet each enjoys an above-average rating on CAPS.

In particular, it seems investors are calling for a turnaround in the oil services sphere, and so it is that this week, we'll be focusing on the big name in the sector: Schlumberger.

The bull case for Schlumberger

• One of the great things about CAPS is that with 125,000-plus investors, we're bound to have a few contributors who can offer firsthand experience with the companies they recommend. CAPS member Torquewrench1969 is one such Fool. Writing in March, he told us this about the company: "I have personally done contract work for Schlumberger, mostly equipment preparation for work in the arctic. ... Their use of high end technology and knowledgeable employees have put them where they are today. It's a "socially responsible" company who is helping us find the resources we desire."
• Which is nice to hear, no doubt. But we're not in the investing game to save the earth -- we're here to make profits. Can Schlumberger help with that? goatsnuff thinks it can, given enough time: "$37 a barrel, nobody wants the drilling stocks. Good place to start building a position."
• What's more, even if low-priced oil sticks around awhile, and even if this puts the hurt on oil producers like ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP), this isn't necessarily bad news for Schlumberger. CAPS All-Star Shouclack points out that: "Oil States will need to increase output to maintain their cash inflow stream... [Schlumberger] is the most viewed oil service company in foreign country like Russia, Algeria and other..."

Which argument I have to admit, has the ring of logic to it. But don't try telling that to Wall Street, where analysts are predicting less than 3% long-term profits growth out of Schlumberger. The Street is convinced that Schlum has peaked, and now it's time for the trough. Thus, we find the stock selling for the apparently low, low price of just 9x trailing earnings.

Now, maybe you think the Street is wrong on this one -- and you may be right. (They may be crazy.) But even then, Schlumberger isn't necessarily a screaming buy. You see, to me, the 9 P/E ratio looks generous because Schlumberger actually generates less free cash flow (FCF) than it reports as net income. While net income for the past 12 months amounted to nearly $5.7 billion, free cash flow at this firm barely hit $3.6 billion. This is typical for capital-intensive businesses so I'm not surprised by the lack of FCF.

Time to chime in
To me, the stock's minimal growth prospects and 13x trailing free cash flow-valuation make Schlumberger look overpriced. Basically, I see no margin of safety here whatsoever -- but I've been wrong before, and could well be wrong here as well.

Based on the stock's 5-star CAPS rating, the rest of Fool-dom certainly thinks so. But what do you think. Click here to cast your vote: Schlumberger, yeah or nay?

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.