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 170,000 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 5% 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 owned any of the five stocks named above last week, you're significantly poorer for it today. The question is ... why? Because it wasn't always obvious.

Beginning at the bottom, Vonage shed more than 7% of its market cap last week, despite there being no news of note -- no reason whatsoever -- for the sell-off. (Er, unless this Fool article was the reason.)

At Tesla, on the other hand, there are plenty of things that went wrong. It could've been that its IPO freeze on insider sales had just expired. Or the fact that Capstone Investments trashed the stock last Friday. Or the fact that everybody but Capstone was busy pumping General Motors (NYSE: GM), and maybe Tesla looked just a little bit less bright and shiny when set in comparison to a newly profitable GM.

The story at Dendreon and Chipotle reads similarly. No news at Dendreon didn't prevent the stock from sliding 5%. Meanwhile, a bad review in Barron's sent Chipotle tumbling 7%. (The business journal argued that the stock's even pricier than the burritos, and faces a profit-margin squeeze as food prices soar.) With investors clearly nervous about the stock prices (as these stocks' one- and two-star CAPS ratings attest), it seems people are willing to sell into a rout on any news, or even no news at all.

Which of these things is not like the others?
Yet investors appear to be viewing the sell-off of one stock on this list as an opportunity. Four-star Mueller Water isn't the sexiest business, but CAPS members seem convinced there's more profit to be found in Mueller's array of pipe and valve products than in all the burritos, VoIP services, electric cars, and cancer treatments of the other four stocks, combined. Why is that?

According to CAPS  member tripleprofit, it's because "spending on water infastructure is one the rise in 2011." DoubleMyNet suggests you "look in your area, see if they have replaced the pipes in the last 50 years since they first installed it."

All-Star investor rws1773 goes even further: "Many municipalities continue to be reliant on parts of their water distribution infrastructures that in some cases are over 100 years old. Upgrades and increased efficiencies in our water distribution systems are required throughout the country ... "

Should you invest in Mueller's "pipe" dreams?
Then again, people have been talking about the wave of infrastructure improvement that's "just about" to break over this country for years. "Shovel-ready" projects, in dire need of shoveling, were the engine that was supposed to break us out of the Great Recession ... two years ago.

Sadly, the surge in free cash flow that Mueller experienced in 2008-2009 -- approaching $94 million in 2008 before slowing slightly to $90 million in 2009 -- has already slowed to a veritable trickle. Last year, the company generated all of $30 million in cash profit from its business, despite cutting back capital spending to near-2005 levels. If this is the way things seem to be going, I worry the stock may not be quite as attractive as our CAPS members believe it to be.

Foolish takeaway
To my way of thinking, whether Mueller bounces back from its new lows depends a lot on whether government and utility spending on infrastructure bounces back, or continues to limp along on a shoestring. Personally, considering the state of municipal finances today, I'm not optimistic. But even if you are -- even if you believe Wall Street's rosy reassurance that Mueller is bound to grow its profits at better than 17% per year over the next five years -- I have to say that the stock doesn't look particularly attractive at its current valuation of 21.5 times free cash flow.

Seems to me, a better play on the infrastructure boom (assuming it happens) would be a company like Tyco (NYSE: TYC). There, you've at least got an attractive 11-times price-to-free cash flow ratio to fall back on in the event this water boom turns out to be just another pipe dream. Even better, Tyco's 2% dividend trumps Mueller's 1.7%, so if you're inclined to wait and see how the government delivers on its promises, Tyco's the water stock that pays you better for your patience.

That's my opinion. If you think I'm selling Mueller's prospects short, here's your chance to set me straight. Click over to Motley Fool CAPS, and sound off.