"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."

So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And 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:

Stock

Recent Price

CAPS Rating

(out of 5):

Double-Take Software  (NASDAQ:DBTK)

$5.56

*****

Blue Square-Israel 

$5.29

***

Stryker Corp (NYSE:SYK)

$31.53

*****

PDL BioPharma

$5.22

***

The St. Joe Company  (NYSE:JOE)

$14.59

*

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 45% and 70% of its value over the past year alone, and currently sits at or near its five-year low. Wall Street has left 'em for dead, but Main Street investors reply: "Hey! Not so fast!" While we're not optimistic about the prospects at cancer researcher PDL, and are downright pessimistic about Florida real estate magnate St. Joe, two of the stocks on this list earn the full complement of five CAPS stars.

Now, these two beloved firms -- Stryker and Double-Take -- each have plenty of arguments in their favor. But for my money, the better bet is on data-recovery specialist Double-Take. Nor am I alone in thinking this. Turns out, Double-Take is also a recommendation of the Fool's flagship newsletter, Motley Fool Stock Advisor.

Why do the folks at Stock Advisor like this company? You can learn the answer to that question any time you like, just by signing up for a free trial. For now, let's find out why the company is attracting investors on CAPS, as we review:

The bull case for Double-Take Software 

  • globallyfoolish introduced us to Double-Take late last year as a "leader in data-safe/disaster recovery IT systems with a good service revenue business model. Appears to be working well, if not spectacularly - could also be a buyout candidate."
  • Who'd want to double down on Double-Take? Well, the company competes in an industry dominated by larger firms -- EMC (NYSE:EMC), Symantec (NASDAQ:SYMC), and CA (NYSE:CA) -- any one of which could swallow Double-Take whole without batting an eye. And as handoverhill pointed out last summer, Double-Take partners with "Google and Microsoft and Yahoo (NYSE:YHOO) ... in the software companies." What better way to cement the partnership than by buying Double-Take and absorbing it?
  • The price certainly looks right. As vkedia noted in January, the "P/E ratio is good, and no debt." But it may not stay that way for long.
  • Musing over Double-Take's ultra-low valuation, rivilian observed last year: "One of [famous value investor] Joel Greenblatt's maxims is that Mr. Market is (often?) irrational in the short term, but over time gets his evaluations correct. ... [Double-Take] makes good money. It does this in a market that can only grow over the coming decades."

My single take
Personally, I see similar prospects for Double-Take's valuation. Right now, the stock's trading for a P/E of 8.0, and an enterprise value-to-free cash flow ratio of just 2.6. This despite the fact that:

  • analysts expect Double-Take to grow at an 18% compound annual rate for the next five years …
  • … the company boasts strong double-digit returns on both equity and capital, similarly double-digit operating margins, and consistently grosses around 90% …
  • … and the firm's market cap is made up primarily of cash.

Any one of these factors, alone, would argue in favor of the stock's potential. Put 'em together, and it looks to me like game, set, and match. Double-Take's a winner.

Time to chime in
But don't just take my word for it. Give the stock a gander yourself, review the financials, and then tell us what you think about Double-Take. Cheap as it looks, might this stock be some kind of perpetual value trap? Or is it as drop-dead gorgeous as meets the eye?

Whichever way you come down on the question, click on over to Motley Fool CAPS and tell us why.

 

Microsoft, Stryker and Symantec are Motley Fool Inside Value recommendations. Google is a Rule Breakers selection. Double-Take Software is a Stock Advisor pick. The Fool owns shares of Stryker. 

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 currently ranked No. 441 out of more than 130,000 members. The Fool has a disclosure policy.