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 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:

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 rough one for the five companies named above, for various reasons. American Axle and Allied Irish had essentially no bad news last week, yet their stocks tumbled regardless. In contrast, the reasons for the declines at Leap Wireless, Melco Crown, and Shaw Group were glaringly obvious. Leap got tripped up when Wal-Mart (NYSE:WMT) announced plans to introduce a new pre-paid cell service in cooperation with America Movil (NYSE:AMX). No one enjoys the prospects of going head to head with Wal-Mart (and yet, as Netflix demonstrated once upon a time, it is possible to win that fight.)

Meanwhile, private competitors are the least of the worries afflicting two other stocks. Over in Macau, it's the government that's the problem. Regulators there are talking up development restrictions that could curtail Melco Crown's growth plans.

Likewise, Shaw Group's headaches stem from a governmental source. The Nuclear Regulatory Commission voiced concerns about the safety of a key reactor component in the new design put forward by Westinghouse (20% owned by Shaw). This prompted a hasty downgrade from RW Baird. Shaw quickly reassured investors that it had anticipated some hiccups in the application process and still expects to see Westinghouse nuke plants start to come on line in 2016 -- but to no avail. Investors sold off the stock regardless.

Are we all just being nervous Nellies here, or is there reason to be concerned? Fools want to know, and CAPS members provide the answers:

The bull case for Shaw Group
CAPS All-Star tgarci2 introduced us to Shaw Group earlier this year as:

... one of many groups who has a hand in construction from beginning to end. CEO Jim Bernhardt has been buying up businesses since this company's inception and he now has an army with which to build anything and everything. ... SGR is also leading the way with nuclear power plant construction post-westinghouse acquisition, and announced a year ago that is was planning to build 4 AP1000 power plants in china for several billion. Last year SGR's Power group alone boasted revenues 57%!

Fellow All-Star kevinottofro was soon attracted to the stock based on its: "Low relative PE, good star ranking, PEG & 09 P/E still below normal." And lest we forget that Shaw is more than just a "nukes" play, doc1968 reminds us that this company has "multiple overlaping interests woldwide."

A catalyst -- my kingdom for a catalyst!
Whether these "multiple" interests can overcome the stigma of last week's nuclear hiccup, of course, depends in large part on how well Shaw shows it can perform in its other endeavors. And here's the good news for investors brave enough to buy today: Shaw could quickly bounce back from last week's sell-off. Just 10 days from now, Shaw will report its fiscal year-end earnings, providing a clear demonstration of its profit-making prowess.

What will Shaw tell us on Oct. 29? I'm not good at predicting the future, but if it's any reflection of Shaw's recent past, the news should be stellar. Over the last 12 reported months, this company has generated more than $600 million in free cash flow from its business -- a number that has (with the exception of a rough 2006) steadily increased every year for the last five.

As a result, the stock currently sells for an ultralow valuation of four times free cash flow -- dirt cheap for a predicted 16% long-term grower. And while I'll grant you that the company's cash generation varies from year to year, and has averaged something closer to $140 million per annum over the last five years, even a return to such "normal" profits would paint the company's valuation in a very attractive light, relative to its growth prospects.

Foolish takeaway
With a valuation ranging from dirt cheap to entirely reasonable, a rock-solid balance sheet boasting more than $700 million in net cash, and more cash pouring in the door with each passing day, I believe Shaw is poised to bounce back from its crash. And with earnings due out in less than two weeks, I think that bounce will come sooner rather than later.

But hey -- that's just my opinion. If you think it's the wrong opinion, then here's your chance to set me straight. Click on over to Motley Fool CAPS now, and tell me why I'm wrong.

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