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.

It's been awhile, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:

Companies selected from the list of stocks hitting new 52-week lows as reported on finviz.com. Recent price and 52-week high provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Stock investors endured a rough week. As hot new thing Tesla Motors (Nasdaq: TSLA) soared on news of a successful capital raise, old-guard automaker General Motors hit a post-IPO low after reporting a 1.2% decline in May auto sales.

In other news, an analyst downgrade knocked RIM off its axis, Hudson City ignored our bullish prognostications and continued its own downward spiral, and Jefferies tossed cold water on hopes for a quick turnaround at Cisco.

Asked for their opinions about which of these stocks is most likely to revive, Fools show equal optimism for Cisco's shares, and for those of asset manager AllianceBernstein. Both stocks top today's list with four-star ratings. But which of these two "most-likely-to-succeed-ers" shall we profile today? I've already made clear my admiration for Cisco. For a change of pace, let's leave "C" alone, and focus on AB today.

The bull case for AllianceBernstein
CAPS All-Star ValueDragonStyle starts us off with a brief introduction to AllianceBernstein: "The Company provides research, diversified investment management and related services globally to a range of clients."

According to CAPS member ragrillo, the stock "historically been a solid performer." But lately, it's been anything but. As you can see on this chart, around about April of last year, AB began a long-term slide, and began definitively underperforming the rest of the S&P 500 last October.

That's bad news for current shareholders, of course, but according to CAPS member adan04, it's very good news for anyone looking to buy AB today. The stock's selling for a "low P/E," looks to be "on sale," yet is a veritable "cash fountain."

Indeed, over the last 12 months AllianceBernstein has generated more than $132 million in free cash flow from its business. That's more than it reported as net earnings for the period, a feat AB has managed to pull off in two out of the last three years. The stock trades for a little under a 16 times multiple to both earnings and free cash flow.

And it gets better. Traditionally, investors have valued metric asset managers with the rough formula that assets under management times 2% should equal market cap. In which case, AB's $485 billion AUM should make the company worth $9.7 billion -- instead of the $2.1 billion its shares fetch today.

Foolish final thought
Sound attractive? Well, before you get too excited about our CAPS members' favorite "bounce candidate," remember that the 2% rule of thumb isn't always uniformly applied -- and investors seem to have forgotten it entirely in recent years. Famed value house Legg Mason (NYSE: LM), for instance, carries a market cap of only $4.8 billion these days, a mere 0.7% of its AUM.

Even so, if investors aren't hewing strictly to the old rule of valuation, AllianceBernstein still seems to offer a relative value to Legg. Crunch the numbers, and you'll find that AB's 0.4% AUM valuation has the stock selling at a sizable discount to its rival. So even if AB never reaches historical levels of valuation, a mere closing of the gap with Legg's valuation could mean a near double for buyers at today's prices.

Is it likely to happen? You tell me -- preferably on Motley Fool CAPS.