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:

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
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 old 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 are gonna bounce right back once the suds subside.

CAPS members are telling us there's not one, but two babies they'd like to cuddle up to in this week's list. One of them we know well; after all, SINA is a Motley Fool Stock Advisor recommendation. But there's another stock on today's list that CAPS members like even better.

Just what is this Hologic outfit, though, and what does it do? Well, let's find out, as we review:

The bull case for Hologic Inc.
With its market cap topping $3 billion, if you don't know Hologic yet, you should probably get to know it. The firm manufactures a whole range of diagnostic and medical imaging systems aimed at women's health care -- devices useful in performing mammograms and prenatal birth risk assessments, for example. It competes with the likes of General Electric (NYSE:GE), Philips (NYSE:PHG), and Siemens (NYSE:SI). 

• How well does Hologic stack up against the competition? Back in July, Fellow Fool and CAPS All-Star TMFSarahGen thought Hologic was doing pretty well, calling it an: "Excellent company that specializes in women's health care. Overly punished for a tough integration with the massive acquisition of Cytec. Both Hologic and Cytec have had cutting edge solutions that improve women's health care. Even bigger winner now they are together and as soon as they get over integration indigestion."
• One of the great things about CAPS is that with 125,000 investors and counting, we're bound to have a few contributors who can offer firsthand experience with the companies they recommend. Case in point: curiousgeorgetoo tells us, "I used to work in a pathology lab in a very small town in central Florida, the Cytec bill was close to $48,000 a month. The demand is real; give the company time to sort things out, then they will take off. Really folks, they are the only game in town for these types of tests."
• Finally, from a financial perspective, mbernhagen likes how Hologic has been doing; in early September, he wrote: "Excellent earnings even in a tough economy. Very undervalued and the reduced outlook on 2008 earnings is nothing to get up in arms about. The financials are simply too solid to pass up."

Now I admit that, after taking a quick glance at Hologic's numbers on Yahoo! Finance, I was initially thrown by this last comment. Just what is it that has mbernhagen raving about the firm's "solid" financials? I mean, the stock doesn't even have a P/E!

Closer examination, though, shows that the lack of a price-to-earnings ratio owes entirely to the fact that Hologic took more than a half-billion dollars' worth of writedowns on in-process research and development last year after acquiring Cytec, as required by GAAP. That'll do a number on anyone's P/E (and is precisely the kind of "indigestion" that TMFSarahGen warned about). But it doesn't mean that Hologic can't earn a profit. Far from it.

From a cash perspective, the company is wildly profitable, having generated some $286 million in free cash flow over the last 12 months. Thus, if you net out the firm's cash and the debt it took on to acquire Cytec, the post-merger Hologic is selling for barely 17 times its free cash flow. To me, that looks like a pretty fair price to pay for an expected 16% grower -- maybe not the out-and-out bargain that CAPS' five-star rating hints at, but certainly not overpriced. So I suspect this one's got serious bounce potential on almost any good earnings news at all.

Time to chime in
Agree? Disagree? Whichever way you lean on the stock, come over to Motley Fool CAPS and give us a nudge.

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