Drop-Dead Gorgeous Stocks

"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 the thesis of my weekly Fool.com column "Get Ready for the Bounce," where I run Nasdaq.com's 52-week-lows list through the "wisdom of crowds" meter we call Motley Fool CAPS. Out the other end comes a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even farther, and longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that just hit their five-year lows:

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?
Each of the stocks listed above has shed between 65% and 95% of its value over the past year alone, and currently sits at or near its five-year low. Wall Street's left 'em for dead and ... well, CAPS members seem to agree.

Judging from their two- or three-star ratings, even hefty respective price cuts of 86% and 93% fail to entice investors into buying Goodyear or Textron. But there's one stock on this list that we're happy to own for a "mere" 68% discount from last year's price. To find out why, let's dig into ...

The bull case for Newport
NetscribeTech introduced us to Newport back in early 2007, calling the company:

a leader in the field of t-laser technology ... These products and systems are used in industries as diverse as scientific research, aerospace and security. ... When it comes to competition there are only few pure players in this field, who competes with Newport in almost all the product category and market classifications. Among them Newport is the largest both in terms of market cap and revenue.

(Note, however, that while they might not be "pure players," bigger competitors do exist -- Corning (NYSE:GLW) and JDS Uniphase (NASDAQ:JDSU) to name just a couple.)

A few months later, toozie argued that:

Light-based technologies will help here -- telecomm, solar, etc. Good likelihood of increased government R&D funding will help their sales numbers. they had a terrible (IMHO) transition to a new sales/web front/back-end, and I think that pain is mostly in the past. Very good customer service from my experience.

And last summer, clawre called Newport "one of the few companies buying back stock," adding that it has a "low PE and debt/equity."

One Fool's perspective
I know what you're going to say. "Rich, are you seriously suggesting we consider an unprofitable, debt-laden, small-cap industrial laser maker in the middle of a recession?"

Yes. While it's true that Newport reported losses last year, the emphasis here is on reported rather than losses. From a GAAP accounting standpoint, Newport had a very bad year in 2008 -- one made worse by a near-$120 million writedown of goodwill in its laser division.

That said, from the perspective of actual, cash-in-the-bank profits, Newport did quite a bit better. How much better will be hard to say until the company files its 10-K for the year, but my back-of-the-envelope math suggests the company generated free cash flow of about $24 million last year. That estimate's supported by Newport's latest balance sheet, which shows nearly $25 million in debt paid off, and an almost $5 million increase in cash and equivalents by year-end.

The way I see it, Newport is a cash-profitable small cap selling for less than five times trailing free cash flow. (Add in debt, and the enterprise value works out to about six times FCF.) Not bad for a company that analysts expect to grow at about 12% per year over the long term. 

As far as the short term is concerned, rest assured. Newport predicted it will "be profitable and continue positive cash generation […] despite declining sales this year."

Time to chime in
To me, Newport's numbers tell an attractive story. But is it "drop dead gorgeous?" You be the judge. Click over to Motley Fool CAPS, and tell us whether you think this laser maker will shine in '09.