4 Superball Stocks

When stocks fall fast and far, sometimes they set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 170,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back.

It's been a while, 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 abrupt 10% or greater price drops last week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
Stock markets rediscovered gravity last week, as more than 4,100 companies ended the week with lower share prices than they began with. Several stocks fared particularly badly. Indeed, the four named above were all literally decimated, losing 10% or more of their market cap in just a few short days. So what went wrong?

In several cases, nothing too surprising. Let's begin with Frontier Communications. I warned you about this one last month. The company's on downgrade watch with the S&P on debt that's already junk-rated. Until this situation changes, Frontier is at risk of having to pay even higher interest rates on its $8.2 billion debt load. And, yes, its 18.6% dividend yield could get cut.

Molycorp? Warned you about this one, too, just last December. The company's market cap depends largely on China maintaining severe export quotas on rare earths. But China's restrictions have been challenged in the WTO, and China could be forced to open the floodgates on rare-earths exports at any time. And even without action by China, rare-earths prices have been falling globally. Meanwhile, Molycorp has recently been hit with a series of lawsuits alleging "materially false and misleading statements regarding the Company's business and prospects." Not good.

Diamond Foods' case holds particular interest for me, because I've been warning about this one since 2005! Last week, the house of cards tumbled for Diamond, an erstwhile walnut growers' co-op with delusions of becoming a snack-foods magnate like Frito-Lay. Accusations of accounting irregularities are flying, and the CEO and CFO are fleeing -- both placed on "administrative leave" while the company they built investigates the mess they created.

Of course, the most interesting collapse of last week -- to me, and to the tens of thousands of value-seekers who make up Motley Fool CAPS -- is the five-star-rated Netgear.

The bull case for Netgear
Last week, this computer networking specialist beat Wall Street earnings estimates, and raised its guidance for the year. Wall Street took one look at the results and, um ... sold off Netgear by as much as 12%.

Why? One analyst who downgraded the stock (Deutsche Bank) worried that the company plans to ramp up R&D spending in the year ahead, and that seems to be a common concern -- that costs are rising, and thus will crimp profit margins going forward. Not everyone's scared, though. CAPS All-Star PearlandTX, for example, likes the "strong consumer market position" that Netgear has built.

2gud2btrue calls the company a "solid mid cap," while pfountaine thinks "they look like they've figured it out."

I think so, too. Consider: Right now, Cisco (Nasdaq: CSCO) is in a quandary, refocusing on Internet backbone switches and routers, and trying to figure out just exactly what role it wants to play in the consumer space (and what role Linksys will play) going forward. So what does Netgear do? It takes advantage of the situation, and doubles down on its own home-networking businesses with additional R&D spending. That sounds like a savvy business move to me.

As for the stock itself, I just don't get the logic of downgrading a stock right after a "beat and raise." Especially not a stock like Netgear, which boasts strong free cash flow, $350 million in the bank, a 15 P/E, and a 17.6% growth rate. Everything about this stock tells me it's underpriced and underappreciated, and poised to bounce right back in coming quarters. I'm so convinced of this, in fact, that right now I'm heading over to Motley Fool CAPS to recommend Netgear as an "outperformer." Want to see how it works out? Follow along, and feel free to tell me if you think I'm wrong.

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