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 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 150,000 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 4% 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
"March comes in like a lion," so the saying goes. And true to form, the S&P 500 turned in a strong performance, gaining 3.2% last week. But not all investors are cheering. From bottom up, we find Palm shareholders still reeling from last month's devastating earnings warning, while Sirius shareholders keep 'em company in their misery, still stinging from last Monday's Wunderlich downgrade. Staples likewise faced the analysts' wrath in response to its disappointing guidance, while U.S. Natural Gas continued to lose steam in the face of lower-than-expected gas demand.

Investor reactions to these developments are all over the map, from the one-star rating reflecting extreme skepticism of Palm's prospects, to the middling three stars attached to Staples ... all the way up to the five-star rating at today's top-ranked stock:

China Medical Technologies
CAPS member Voidd thinks China is a "good market" to be in. Although the market for diagnostic equipment is attracting strong competitors in the form of companies like Johnson & Johnson (NYSE: JNJ), Roche, and Abbott Labs (NYSE: ABT), Voidd argues that customers such as the ones China Medical caters to (the company has formed strategic alliances with multiple Chinese hospitals and universities) "may favor local firms" over international alternatives.

CAPS All-Star tctk1044 believes the shares are "heavily discounted." And with China Medical hip deep in a share buyback program, the stock "should bounce back pretty quickly. ... Buying under $17 is good, buying under $15 is great."

BradLSU agrees. Noting that: "Diagnostics are the forefront of all health care," he thinks: "macroeconomic activity for China is just beginning, every city is becoming more civilized, and more and more hospitals/doctor offices will reach more rural markets." And on a more stock-specific note, BradLSU points out that: "If they are stable enough to shell out money for share buyback, this tells me the 3.60% dividend rate is stable for the medium term future." (In fact, not only is the dividend still being paid -- its yield has now grown to 4.1%.)

Good news, bad news
Of course, the reason for the rising yield isn't quite as encouraging. Although the dividend seems to be holding steady, China Medical's stock price has dropped (boosting the yield).

What sent China Med tumbling in the face of bullish investor sentiment? The company reported Q3 earnings Wednesday, showing a steep decline in sales year over year and a loss from continuing operations. On the plus side, revenues ticked up sequentially, and management is indeed busy buying back shares. (Insiders have been buying as well.)

The more important question, though, is whether you should buy.

Problem is ... I'm not entirely certain what the answer is. I mean, on one hand, the stock looks incredibly cheap, with analyst projections for next year's earnings suggesting a forward P/E ratio of less than 11. Relative to the 40% earnings growth they expect to see over the next five years, that sounds almost too good to be true.

"Almost?"
But, it might be too good to be true. Consider: Over the past few years, we've watched China Medical's earnings and free cash flow grow steadily stronger. This year, however, the company seems to have encountered some real troubles. Operating cash flow over the past two quarters totaled a mere $18.5 million, suggesting an annual run rate of just $37 million. If that's the way things play out by year-end (like most Chinese companies, China Medical only publishes complete cash flow information annually), the company would fall far short of last year's $68 million in free cash flow, marking its first decline on this metric in four years.

Time to chime in
Are international competitors finally beginning to chow down on China Medical's lunch? Is this the beginning of the company's long, slow slide into irrelevance?

The data's too thin for me to say for sure just yet -- but I am starting to worry. That said, I'm willing to be reassured. If you've got a theory for why China Medical's troubles may be fleeting and temporary, and its stock a great bargain, my ears (eyes) are open. Click over to Motley Fool CAPS now, and give it your best shot.