"'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."

That's 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 for 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 think 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 have 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:


How Far From 52-Week High?

Recent Price

CAPS Rating (out of 5)

China Security & Surveillance (NYSE: CSR)




CF Industries (NYSE: CF)




Archer Daniels Midland (Nasdaq: ADM)




Patriot Coal (NYSE: PCX)




AK Steel (NYSE: AKS)




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
There's no two ways about it: If you were invested in these stocks last week, you're significantly poorer today because of it. CF Industries took a hit when rival Agrium dropped its bid to acquire the shares. Nor was it the only victim in the agro-sphere. News of a federal inquiry into concentration of power in the American agriculture industry rocked the stocks of industry giants from DuPont (NYSE: DD) to Monsanto (NYSE: MON), and did a real number of ADM. Meanwhile, Patriot suffered a scandal of another sort, when John Renner, foreman at one of its mines, pled guilty to faking records on safety inspections there.

The declines at AK Steel and China Security seemed positively plebeian in contrast. The former owed simply to Goldman Sachs downgrading the stock. Meanwhile, China Security's stock seems to have dropped only because there'll now be more of it to go around. More on that in a moment, but first, a few words from the Fools who have helped make China Security this week's top-ranked stock.

The bull case for China Security & Surveillance
China? Security? Surveillance? chk2595 draws the obvious conclusion that the company's name demands: "Lots of potential customers and profits here."

hoscalek cites a few points in the company's favor: "solid balance sheet, profitable, strong growth, government clients."

And CAPS All-Star caidencollett07 adds a few more: 

Business is diversified between both the private sector and the government sector ... Strong organic growth ... Stabilizing gross margins ... Despite the large growth seen in revenues, the company is profitable.

Now, about that dilution ...
Now let's address the elephant in the room -- the single apparent reason for last week's sell-off at China Security & Surveillance. On Wednesday, the company announced plans to float as many as 23 million new shares of common stock, raising cash to pay down debt and "for general corporate purposes, including future capacity expansion, strategic acquisitions, capital expenditures and research and development expenditures."

Seeing as CSS only has 65 million shares in existence already, issuing 23 million new shares promises to dilute existing shareholders significantly. But is the news really bad enough to justify knocking 15% off of the stock's price last week?

I think not, and here's why:

Cash flow surveillance and ...
First off, CSS isn't doing this follow-on offering because it needs to -- but because it wants to. CSS generated $48.5 million in free cash flow last year -- enough to pay off its $44 million in long-term debt in less than a year's time, using cash flow alone. After years of burning cash, it looks to me like CSS is finally able to stand on its own.

... balance sheet security
So why is CSS doing the offering in the first place? To raise a big bundle of cash with which to continue rolling up smaller competitors in the Chinese security market. Take CSS's existing cash war chest of $155 million. Add the $170 million it could raise from the equity offering, even at today's now-depressed stock price. Subtract the debt it promises to pay off. You're left with a $280 million pile of cash for snapping up attractive acquisition candidates.

I'm not sure CSS even needs to find more potential buys to justify the stock's current price. It's only selling for a little more than 10 times annual free cash flow right now, even with a market cap comprising 40% cash (after the equity issuance). Back out the cash, and you're looking at an enterprise priced at less than eight times free cash flow.

Time to chime in
To me, this looks like the ultimate in no-brainer bargains. Maybe you see something that I'm missing? If your surveillance has detected a gap in CSS's security, I'd really love to hear about it. Drop by Motley Fool CAPS today and clue a Fool in.

China Security & Surveillance sounds like a good deal, but are there even better bargains available in China? You bet there are: Click. Read. Learn.

Monsanto is a Motley Fool Inside Value pick, but Fool contributor Rich Smith does not own shares of any company named above. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 697 out of more than 160,000 members. The Fool has a disclosure policy.