"'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 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?

Of course not. 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:

Company

How Far From 52-Week High?

Recent Price

CAPS Rating (out of 5):

Patriot Coal  (NYSE:PCX)

-35%

$11.57

*****

Elan (NYSE:ELN)

-42%

$5.31

****

Ambac Financial  (NYSE:ABK)

-66%

$1.20

*

Freddie Mac  (NYSE:FRE)

-46%

$1.18

*

Fannie Mae (NYSE:FNM)

-45%

$1.36

*

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. Fannie and Freddie got kneecapped early when Wall Street analyst Keefe, Bruyette, Woods declared their stocks worthless. Ambac was spared the ignominy of their downgrade, but it still got knocked down in sympathy -- and remains on the mat. (And if you ask CAPS members, they think all three stocks should stay down.)

In contrast, Elan still gets high marks from investors, who seem unfazed by Friday's news that the EU is reviewing the safety of Elan's multiple sclerosis drug, Tysabri.

Finally, last and best (in the opinion of our 140,000 amateur stock analysts) comes Patriot Coal. Patriot had no bad news of its own to report last week. Yet downbeat reports from the nation's coal-hauling railways -- Burlington Northern (NYSE:BNI) and Union Pacific -- followed by negative comments from Jim Cramer on CNBC, knocked the stuffing out of the stock. The question we ask now is whether a few bad reports from the transport sector can upset ...

The bull case for Patriot Coal

  • CAPS All-Star Scoobrs doesn't think it has. Praising Patriot's: "Low debt," and calling the stock "undervalued," Soobers predicts that: "Coal will outperform on inflation and early recovery during the energy-intensive, economic ramp-up."
  • lonewulf47638 adds that: "most energy is from coal." Plus, for Patriot's: "Sales growth and earnings are up."
  • Last but not least, jrmart predicts that an energy-hungry: "China will probably buy this company out."

I don't know that I'd go that far -- or risk cash on the gamble even if I did think a buyout was possible. But there's no denying that a growing China needs energy to feed its expansion, and that coal is its fuel of choice. As a supplier of this in-demand commodity, there's no need for Patriot to sell itself to China; all it needs is to sell China its coal, ton by lucrative ton.

Lucrative? How lucrative?
Want to know how much Patriot's coal is worth? Well, at last report, the company controlled some 2.4 billion tons of this dirty black gold. Patriot's assets are primarily Appalachian and Illinois Basin coal, where the coal fetches market prices of from $40 to $56 a ton, so conservatively speaking, that's $96 billion in assets -- yet Patriot itself carries a market cap of barely $1 billion. Plenty of room for a bounce here if the recovery picks up steam.

Now, there's obviously a big difference between the value of coal in situ -- especially when the situ in question may lie many thousands of expensive feet beneath the surface -- and coal loaded in boxcars, ready for shipment. Still, compare Patriot's valuation to that of somebody like Peabody (NYSE:BTU), where less than four times Patriot's reserves (9.2 billion tons) translate into a market cap nearly 12 times as large ($11.5 billion). Seeing as both coalminers earn similar profit margins (about 10%) on their products, it's reasonable to suspect that Patriot's stock is not being properly priced today.

Word to the Foolish
Is this a sure thing? Of course not. And there are plenty of reasons to prefer Peabody over Patriot. For one thing, while both coalminers report "profits," Peabody is also generating solid free cash flow from its business; Patriot is not. For another, Peabody's projected growth rate is nearly twice as high as Patriot's. (I wonder if that's why Peabody spun Patriot off?)

Still, I find Patriot's possibilities intriguing -- and judging from its five-star rating, a lot of investors on CAPS agree. But that doesn't mean you have to. So here's your chance to make your views known. Click on over to Motley Fool CAPS now, and tell us tell us what you think.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.

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

Elan is a Motley Fool Rule Breakers selection.