Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) 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 where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at WSJ.com:

Companies are selected from the "New Highs and Lows" lists published on WSJ.com on Friday last week. The 52-week high, recent price, and CAPS ratings are from Motley Fool CAPS.

Although these stocks are scraping 52-week lows on Wall Street, down here on Main Street they still enjoy strong investor support. Take Smith & Wesson, for example. On Friday, I described how the company disappointed investors with its anemic fiscal Q1 2011 earnings report -- and outlined for you the risks S&W faces of misfiring again in the quarters to come. Yet as CAPS All-Star motleyanimal points out, not everyone finds this prospect troubling. In fact, the All-Star says investing legend "Carl Icahn is buying," raising the prospect that "maybe something will happen here."

Admittedly, as buy theses go, that one's pretty slim. But what about China Sky One Medical? The company cut earnings guidance last Friday, and announced the resignation of its CFO "due to health considerations." That's certainly not good news, but is it a reason to sell? Earlier this summer, CAPS All-Star dsp444 was praising China Sky's "good, growing earnings ... solid margins and returns." Of course, that was before the CFO left the stage ...

Which of these things is not like the others?
Which brings us to ON Semiconductor. In contrast to the others on this week's list of 52-week-low-sitters, ON's major problem last week was "guilt by association" with a beleaguered semiconductor industry. Last week, Intel (Nasdaq: INTC) got hit with a downgrade over fears of an impending profit margins squeeze. Silicon Labs (Nasdaq: SLAB) issued an earnings warning, and National Semiconductor (NYSE: NSM) followed suit, while Texas Instruments (NYSE: TXN) narrowed its guidance range somewhat. Before you knew it, analysts including Caris & Co., Roth Capital, and Pacific Crest were downgrading every semiconductor company in sight, ON included.

And yet we've not heard whether things are as bad at ON as everywhere else. Is it possible that ON will sidestep the turmoil? Might this stock actually be a buy?

The bull case for ON Semiconductor
CAPS member pattyglass thinks so, arguing that it's "all about power" -- and ON Semiconductor says that its new chips "maximize overall power supply efficiency and "minimize power consumption during power down states."

In addition to this advantage, RickyTaylor likes ON's "[t]ight expense control, organic growth from market share increase in existing markets, growth by acquisition with cost synergies."

To illustrate, CAPS member Wendykitty pointed out back in May that ON had "just paid back a huge amount of debt ... [and even better, had] a lot of cash" on hand.

Checking back four months later, ON still has a fair-size stack of cash (admittedly, alongside a still-big pile of debt). But what's truly attractive about the stock is its valuation. Selling for less than 11.5 times trailing earnings, ON enjoys a projected growth rate large enough to make the stock look like quite a bargain -- 15%. Even better, thanks to cash generation that greatly outstrips its rate of reported earnings, ON's price-to-free-cash-flow ratio comes in at a modest eight times multiple.

Foolish takeaway
Things may be tough in the semiconductor sector over the next quarter or two, but numbers like these give investors in ON a pretty big margin of safety on their investment and a good-size margin for error on their buy-in price. Temporary downturns notwithstanding, the stock looks nicely priced for long-term outperformance.

Or so say I. But what we'd really like to know is what you think about ON Semiconductor. Is the stock as good a value as it appears, or is there "another shoe" left to drop? It seems everyone else in the semiconductor industry has issued an earnings warning, so ... what's to keep ON from doing the same? Click over to Motley Fool CAPS now, and tell us what you think.

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