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.

It was a rough week for stock investors. The Dow dropped nearly 2%, while the Nasdaq dipped into negative territory for the year. Which brings us to today's feature.

The week in weak stocks
Leading off this week's hit (by a truck) parade is Hewlett-Packard. Hewlett dominated the headlines this week, berating Oracle (Nasdaq: ORCL) for discontinuing development of software that would run on its servers, investing heavily in "cloud projects," and partnering with AT&T (NYSE: T) to launch its TouchPad tablet. Yet, perversely, it seems to be suffering from a series of reports citing the competition from tablets as hurting its core PC business.

Competition's the theme at Cree as well, as fears are growing that LED initiatives at Samsung and LG could erode Cree's advantages.

Consistent with its status as one of the nation's biggest banks, Bank of America's slide is much harder to assign a cause. It could have been the government's decision to cut off payments for "foreclosure prevention" efforts, fears of greater losses from the housing crisis, or the Senate's nixing a bill that would have mitigated the cuts to interchange fees on debit cards. Spin the wheel and pick your poison.

Target's fall was easier to pinpoint: On Wednesday, The Wall Street Journal ran a high-profile piece questioning whether the retailer had "lost its cachet." The stock's sellers seem to think it has.

Which brings us Fool-circle to Dolby Labs, the highest-rated stock on today's list, and the only one which seemed to have no bad news to report last week. (To the contrary, it received an upgrade from All-Star CAPS investor Brigantine.)

The bull case for Dolby Labs
What's the matter with Dolby? I can only imagine that the same bearish reports on PC sales that did in HP last week also hurt the company that provides the audio systems for so many of those PCs. Yet despite the negative price action, Foolish CAPS members continue to be bullish about the stock.

All-Star CAPS investor colddrink73 calls Dolby a "good solid company." Fellow All-Star NODISCOJOE says "DLB is a winner."

Admitting that the decline in the PC market has hurt this company, CAPS member Blackarrow1969 points out that:

there is some hope on the horizon. Near-Field Communications (NFC) may be a breakthrough technology which transforms how people pay for goods and services. Dolby owns Via Licensing, which in turn owns the NFC Patent. So no matter what chipset maker or other company prevails with NFC, you will benefit with this stock.

Best of all, CAPS member StockClueless points out that this "great stock" isn't just priced at a 52-week low. It's "currently trading at its 18-month low ... with $0 debt and P/E = 17."

All of which is true. On the other hand, it's also true that Dolby has begun to stumble in the cash flow department, and with free cash flow now lagging reported net income, the price-to-free cash flow ratio on the stock is a bit higher -- 18. Meanwhile, Dolby's 15.5% long-term projected growth rate suggests the stock isn't yet crazy-underpriced.

Time to chime in
At least it's not crazy-underpriced on an absolute basis. Relative to where the stock has been in years past, however, the stock is selling at a discount. Over the past five years, for example, Dolby's P/E ratio has averaged somewhere in the neighborhood of 26 -- or about 50% higher than the stock's current multiple. But whether Dolby gets back to that level of valuation depends a lot on the success of PC, DVD player, and related hardware sales, and the licensing revenues Dolby derives from them.

I personally believe Dolby will bounce back, but what about you? Do you see a rebound in Dolby's future, or is this company just an echo of its former self? Tell us on Motley Fool CAPS.