"'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 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've suffered dramatic drops over the past week. With a little help from the 140,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:



How Far From 52-Week High?

Recent Price

CAPS Rating
(out of 5)

Coventry Health Care (NYSE:CVH)




New Gold




Golden Star Resources




IMAX Corporation 




Eastman Kodak




Companies are selected by screening on finviz.com for abrupt 5% 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 rough one for these five stocks, and Friday in particular treated them harshly. The punishment incurred by the gold miners in particular seems unjust. On no news that I can find, the whole sector took a tumble. AngloGold Ashanti (NYSE:AU) shed a fraction of a percent; GoldCorp (NYSE:GG) lost more than 2% -- but these pale in comparison to the 5%-plus declines at New Gold and Golden Star.

Other firms' declines, however, at least have some explanation -- if not necessarily justification. Eastman Kodak's decline, for example, seems a reaction to the potential for stock dilution inherent in its latest issuance of $400 million in convertible notes. Meanwhile, IMAX and Coventry suffered the indignities of twin downgrades. Of the two, Coventry's public dissing by Goldman Sachs seems the more interesting. Let's see if CAPS members agree with Goldman -- after which we'll dig a little into the details of the downgrade.

Diagnosing Coventry Health Care 
CAPS All-Star Caligiuri, at least, begs to differ with the gurus at Goldman. Recommending the stock earlier this year, Caligiuri observed that Coventry's "Investments, Repurchasing stock and other things of that nature have scared short term investors. Growth prospects seem good, insiders own a large stake, emerging industry, and undervalued."

Eschewing the short-term view and focusing on the big picture has certainly worked out for another of our All-Star investors. Last year, tj99 praised Coventry as a "[s]olid company," suffering from a "terrible time in the markets. Who knows what is ahead for health care? But good companies adapt, and this is a buying opportunity if you have a long term perspective, and can tolerate the uncertainty." Result: tj99 is beating the market with a stick -- up 64% on the Coventry recommendation in less than a year's time.

And the more things change, the more they stay the same. One year after tj99 first recommended it, fellow All-Star HARTLESS63 liked the firm's "low ratios," but Coventry is "subject to reduced profits due to health care reform." But like the member said -- who really knows what will happen?

What I do know is that Goldman has a point. Downgrading Coventry to "sell" last week, Goldman argued that:

  • Coventry owes much of its recent growth to its participation in Medicare Advantage plans, where medical costs are rising -- threatening the insurer's profit.
  • Also, Coventry shareholders will not enjoy the outcome if that threat materializes. Priced at nearly 13 times earnings, Coventry's shares seem expensive compared to rivals'. And indeed, both Aetna (NYSE:AET) and WellPoint (NYSE:WLP) shares are valued closer to 11 times earnings. Considering that most analysts expect Coventry to grow profit slower than Aetna but about in line with WellPoint, the valuations do seem to show a disconnect.

My hunch, therefore, is that Goldman was right to downgrade Coventry -- and investors were right to sell it off last week. That said, I don't want to leave you with a dark, gloomy cloud today -- so allow me to present a "silver lining" to this bearish thesis:

Coventry's earnings look a bit low compared to its rivals, true. But Coventry also has the lowest price-to-book ratio of the bunch -- just 0.9 times book value, compared to valuations on Aetna, WellPoint and UnitedHealth that range from 1.2 all the way up to 1.5. So while Goldman has grounds to call Coventry expensive from a P/E perspective, I submit to you that it's equally valid to say that Coventry looks cheap from a price-to-book perspective.

Foolish takeaway
Does that mean I'd buy the stock myself? Not necessarily. Recent turmoil in the housing and banking sectors has taught me a hard lesson in the (un)reliability of "book values," which can change in the blink of an asset writedown. But if Coventry's assets are as valuable as they appear, and if President Obama's health-care initiatives don't make the entire insurance industry go "poof!" overnight ... well, there's at least a chance that Coventry could prove a tempting takeover target to one of the survivors of this health-care mess.

In which case, yes, Coventry could turn superball on us.

Time to chime in
Will Coventry turn superball, or are investors here in for a super fall? Click on over to Motley Fool CAPS and tell us what you think.

Coventry Health and UnitedHealth Group are Motley Fool Stock Advisor picks. IMAX is a Rule Breakers selection. UnitedHealth and WellPoint are Inside Value selections. The Fool owns shares of UnitedHealth. 

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. 704 out of more than 140,000 members. The Fool has a disclosure policy.