5 Superball Stocks

In my recurring Fool column, "Get Ready for the Bounce," we search 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 fallen stock to bounce back?

Nope. Sometimes stocks fall hard, 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'll look at a few equities that've suffered dramatic drops over the past week. With a little help from the 165,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Companies are selected by screening on finviz.com for 10% or greater price drops over the week ending last Friday. 52-week high, recent price, and CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
Buoyed by a series of positive earnings announcements, markets bounced back last week -- but not all stocks were so lucky, as the five 10%-droppers named above demonstrate.

Beginning at the bottom, Western Digital got rocked by an earnings miss Wednesday, as did QLogic on Friday, and adding terror to injury, Rosetta announced yet another executive departure and was quickly stomped by a pair of analyst downgrades. Transocean's troubles continue as the BP rig disaster continues to ooze disappointment, and MedcoHealth …

Why, as it turns out, MedcoHealth provided the sole exception (on this list) to last week's tale of 10% woes. Not only did the company post improved earnings and beat estimates -- it actually raised estimates for the year going forward. Is this really the stuff of which 52-week lows should be made?

Let's find out.

The bull case for MedcoHealth
Not according to the Fool's own TMFDeej, who argues convincingly that: "This distributor of drugs and devices to the healthcare industry is poised to benefit from the government-mandated increase in the number of insured and the coming wave of generic drugs...which are significantly more profitable for distributors."

AmericanGenius agrees, calling Medco a play on "health care reform" and "my baby boomer play," both.

TopSecretFool thinks so too: "Generics will give [MedcoHealth] a boost. I am not so sure about the personalized medicine sector, but the new acquisition of DNA Direct may open a steady stream of income in pre-natal and cancer predisposition testing, which may grow in the long term. This is a stock that will take some patience."

Fun with puns?
Do I detect a pun there? Perhaps so, because whatever Medco's prospects fulfilling patients' drug needs, investors aren't showing much patience at all with the stock. And I think that's a mistake.

Consider: At a P/E of just 17.2, Medco isn't all that expensive a play. Not at analysts' projected 17.1% long-term earnings growth, and certainly not with the company generating so much more free cash flow than it reports as net profit. Fact is, MedcoHealth sells for under 11 times it trailing free cash flow, meaning that if the company grows at anywhere near the rate analysts project for it, the stock should produce simply monster returns for its investors from this level.

Foolish final thought
Are there cheaper ways to capitalize on the changes to heath care than by buying MedcoHealth? I'm certain there are. Walgreen (NYSE: WAG) at 14.4-times earnings, and CVS Caremark (NYSE: CVS) at 11.9 times both compete with Medco, and both look considerably cheaper than their rival. But neither one offers the difference between reported earnings and underlying free cash flow that Medco boasts.

My prescription: With a price this small, and a margin of safety this big, you could do worse than considering this one for your portfolio.

Or not. Here at Motley Fool CAPS, we're always open to a second opinion. If you've got a different take on MedcoHealth and its prospects, we'd love to hear it.