4 Superball Stocks

When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.

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 are selected by screening on finviz.com for 10% 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.

Four super falls -- one superball
Last week wasn't a great one for stocks. With the Dow Jones Industrial Average (INDEX: ^DJI) dropping 2%, and the S&P 500 sliding 2.5%, more than 4,400 of Wall Street's best and brightest saw their market caps decline. Up above, you see four of the week's worst performers -- each of which was decimated, losing 10% or more of its market cap.

So what went wrong? In most cases, the answer can be summed up in one word: earnings. On Wednesday, Level 3 Communications reported slightly better-than-expected sales in Q3 -- but a worse-than-expected net loss, of $1.75 per share. The news was bad enough to rank Level 3 among the worst performing stocks for the day on the NYSE.

Two days later, it was Alcatel-Lucent's turn to disappoint (but not surprise) us. The Franco-American company's earnings were no treat for investors: Sales slipped 7% in Q3, and full-year guidance got cut. CEO Ben Verwaayen said the company was operating "not at a level we are satisfied with." I suspect many shareholders agree.

Frontline, while not reporting last week, nonetheless managed to live up to its name in a different way -- stepping to the front of the line of the 10 most-shorted stocks in the shipping sector. They say there's no such thing as bad publicity, but I suspect this is one honor Frontline would have preferred to pass on.

Last but not least, we come to the most interesting "disappointment" of all: ITT.

The bull case for ITT
On Tuesday, industrial conglomerate ITT became one of Wall Street's apparent worst performers, ending the day down 18% from where it had closed Monday. This wasn't the result of some disastrous bad news, however, but rather the culmination of a long-awaited double-spinoff-cum-2-for-1-stock-split at ITT.

ITT shareholder and CAPS investor truthisntstupid explained what happened in a Fool blog post Thursday: "The spinoff worked as follows. If you had actually owned, say, 10 shares of ITT before the split and spinoff, then afterward you would end up with 10 shares of XLS, 10 shares of XYL, and 5 shares of the 'new' post-2:1 split ITT."

The new companies, named respectively ITT Corp., ITT Exelis (NYSE: XLS), and Xylem (NYSE: XYL), operate in three separate industries, and as CAPS member jerryz11 recently argued, this is a good thing for investors: "The spinoff of its water and defense divisions ... create[d] three smaller companies that compete well in their respective niches. Each is small enough to be excellent acquisition candidate. XYL, the water business, will become the largest pure play on water technology ... XLS, the defense business, may drop the most in price in initial trading."

Breaking up is hard to ... comprehend
Of the three new companies, only rump ITT currently has enough ratings on CAPS to earn it a star rating -- but Fools like it a lot, giving ITT Corp. five stars. The company says it will do about $2 billion in sales this year. Its 92.5 million shares (post-reverse stock split) give ITT a $1.9 billion market cap, and thus rump ITT now sells for less than one time annual revenue. Cheap!

The water division, now known as Xylem, is roughly twice as big as its former parent company. Trailing revenues amount to $3.6 billion, which weighed against a market cap of $4.7 billion, makes Xylem a bit pricier looking than ITT proper.

The biggest spinoff of all is ITT Exelis, which comprises the IT, defense contracting, and aerospace divisions of old ITT. Exelis boasts $5.9 billion in annual revenue, but according to S&P Capital IQ, carries only a $2.1 billion market cap. It's therefore arguably the cheapest chunk of ITT available for sale today.

Time to chime in
Like I said, so far only ITT proper has a CAPS rating -- but hopefully that won't be true much longer. Now that you know the other companies are out there, it's time to start rating them. Do you believe Xylem will outperform ITT? How about Exelis; will it outperform Xylem? Can any (or all) of these companies beat the S&P 500? Head over to Motley Fool CAPS today, and place your bets.

And while you're at it, make sure to add all three companies to your Fool watchlist. It's going to take awhile for the big financial data sites to wrap their minds around the spinoffs and get their numbers straight. Until they make their minds up, your best chance of understanding what's going on is to make sure you get the news as soon as it happens:

• To add ITT to your Fool watchlist, click here.
• For Xylem, click here.
• And for ITT Exelis, click here.