5 Superball Stocks

"'Don't catch a falling knife' ... 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 runs the thesis of my recurring Fool.com column "Get Ready for the Bounce," in which we search among the wreckage of Mr. Market's overturned cutlery drawer, hoping to find future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a potential bouncer?

I say nay. Sometimes, stocks fall far in far less time than a year -- and like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we're going to look at a few equities that have suffered dramatic drops over the past week. With a little help from the 135,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
Last week was a tough one for these five companies. American Capital reported a half-billion-dollar loss on Tuesday, and lost 17% of its market cap in a matter of minutes. Sequenom lost a far smaller amount of money, but its stock took a similar tumble.

On the flip side, General Cable earned a fine profit, yet warned that this quarter's earnings will fall 30% below Wall Street's expectations. Manulife actually increased its earnings, but it also cut its dividend. You know the drill by now -- both these stocks collapsed as well.

The most interesting story last week  was what happened at dual Motley Fool recommendation American Oriental. True, the company missed earnings, but didn't report until after market close on Friday, whereas the stock jumped off a cliff two days earlier -- on Wednesday. Hmm. Did somebody say shenanigans?

The bull case for American Oriental Bioengineering
I have to say, Fools, that the timing looks suspicious. On the other hand, it could have been a coincidence. After all, when American Oriental took its plunge Wednesday, a number of Chinese stocks were holding hands and jumping off alongside it. Baidu.com (NASDAQ:BIDU) and CNOOC (NYSE:CEO), for example, also had a tough time of things Wednesday. Meanwhile, a lot of Fools are taking two aspirin and holding firm to see how American Oriental fares this morning:

• CAPS member benpe calls the stock "vastly undervalued."
  
  
• CAPS All-Star Wiegman not only agrees, but backs up the thought with some numbers: "I like the P/E (9), the P/B is good (1.29), and I think this is a good entry to both the Chinese market and Pharmaceuticals. I like the comparison Jeffrey Walkenhorst made between AOB's management and that of BYD." (Read more about Chinese automaker BYD here. As for Walkenhorst, if the name doesn't ring a bell, he's a former Bank of America (NYSE:BAC) analyst, now running his own shop.)
  
  
• But perhaps our best CAPS member comment comes from stoerm. You see, one of the great things about CAPS is that with 135,000 members (and counting), we're bound to come across a few Fools who have firsthand knowledge of the companies they're rating. That appears to be the case with stoerm, who writes: "Packaged traditional Chinese medicine (TCM) seems to be gaining popularity in China. Over the last 10 years I've watched TCM move upscale from back-alleys into shopping malls. ... AOB seems well positioned to take advantage and undervalued to boot."

All of which sounds very promising indeed. But what about last week's sell-off? And how bad was Friday's report? Here are the highlights:

• Q2 2009 revenue was up 21% over Q2 2008 (good).
• Profits dropped a penny to $0.17 per share (bad).
• Free cash flow increased rapidly versus Q1, but still sits 10% lower than where it was at the end of the first half of last year (good ... then bad.)
• Shares outstanding increased nearly 14% year over year (very bad).

Now don't get me wrong -- I'm actually pleased to see American Oriental generating $25.1 million in free cash flow so far this year, while it's reporting only $21 million in "net earnings." With cash generated so far outpacing "accounting profits," this stock could well be even cheaper than its current P/E of less than 9 makes it appear. All I'm saying is: Don't get so excited over American Oriental's ultra-low price tag that you miss the warning signs.

Time to chime in
Suspicious trading patterns, flat year-over-year profits, and a sudden decline in cash production are all very good reasons to be cautious. The fact that the share count is rushing higher doesn't exactly please me either. And yet, the share price entices.

Honestly, I'm in a quandary, Fools. I own the stock already. I like the valuation -- but I do not like all these red flags flapping about. So can you help a Fool out? Click on over to Motley Fool CAPS now, and tell us whether you think this stock's in trouble.

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