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 165,000-plus 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
If you had money invested in the stock market last week, chances are, you have less of it this week. Rare was the stock that didn't lose market cap (in fact, according to finviz, the list of the walking wounded ran to 2,649 names), but the ones named above suffered worse than most -- falling 10% and more over the course of the week.

Why pick on metals and miners in particular? The Wall Street Journal blamed a "trio of negatives" -- European credit concerns, Chinese economic tightening, and now the Hungarian budget crisis -- as frightening investors away from metals stocks generally. Of particular concern to the Journal was the downgrade that Goldman Sachs issued on United States Steel, which precipitated a steep sell-off in the stock (down 7.3% on Friday alone). Says Goldman, USX faces particular risk in the form of a U.S. government moratorium on Gulf oil drilling, which could hurt demand for oil tubes and piping.

Now logically, that would be bad news for Arcelor Mittal as well -- and at the same time, this European company can be expected to suffer worse than U.S. Steel from any European meltdown. But in fact, CAPS members rate Mittal higher than the other stocks named above. Why?

Let's find out.

The bull case for Arcelor Mittal
Let's start with the obvious. NOTvuffett reminds us that Mittal controls "about 8% of global [steel] production (which makes them the largest), [so] when the economy improves it will too."

Of course, you can argue the reverse, too. If the economy gets worse, then anyone owning 8% of the steel sector will get worse, too. But if that's the way things play out, CAPS member wvfreys still sees Mittal riding out the storm: "[Mittal] has dropped debt from $36B [t]o the low 20's in last 3 years. They generate good cash flow, are makign money at 60% capacity, prices are goign up, ant [they] have been using this slow period to position themselves for the future with equipment and technology upgrades."

Last but not least: CAPS member sjacobs26 takes refuge in the knowledge that even if profits fall apart completely, "[Mittal] is undervalued based on price/Tangible book-1.3x."

Safety in numbers
Which I have to admit is reassuring. Tangible book value -- generally interpreted as the "liquidation value" of a company's shares in the event it gave up trying to earn profits, and just sold off all its hard assets, paid off its debts, and distributed everything left over to the shareholders -- nearly suffices to cover the full cost of Mittal shares. So even in the worst-case scenario, shareholders shouldn't take too much of a bath here, right?

Actually, that's more right than you know. sjacobs checked in on Mittal's book value nearly a month ago, after all -- way before last week's stock market slump. Turns out, the new numbers have Mittal selling for a 6% discount to tangible book value. In and of itself, this suggests the stock is "cheap." And when you consider the company's valuation relative to a few of the larger U.S. companies -- AK Steel (NYSE: AKS) at 1.8 times tangible book value, U.S. Steel at 2.2x TBV, and Nucor (NYSE: NUE) at 2.8x -- it's hard to argue this stock is anything but a screaming "buy."

Foolish takeaway
Now, does this mean the stock is destined to bounce back up in short order? Hardly. Short-term focused traders, their eyes fixed firmly on the Gulf while their ears strain to the melodious tunes of CNBC describing the European Debt Apocalypse, may not be interested in jumping on distressed assets just right this moment. Rest assured, however, that in the Fool-ness of time, calmer heads should prevail, calmer fingers will punch the appropriate numbers into their calculators, and the appropriate conclusion will be reached.

When that happens -- be it weeks, months, or years from now -- I do believe investors in Mittal will see their faith in the company rewarded.

Disagree? Hey, this is the Fool. Feel free. If you think the situation at Mittal is worse than I've described, click over to Motley Fool CAPS now, and tell me why I'm wrong.