5 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 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. Recent price and 52-week-high data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
After a weak start, the S&P 500 managed to pull out another win Friday, ending 1.7% up on the week -- but not everyone was so lucky. More than 1,900 separate companies ended last week lower than they began it, and some fared even worse. Up above, you see the names of five companies that were literally decimated last week, each losing at least 10% of its market cap. So what went wrong?

In some cases, nothing at all. Take Netflix, for instance. Writing about the company's earnings release last week, my fellow Fool Anders Bylund summed things up thusly: " Netflix met or exceeded analyst targets, will return to rapid international expansion ahead of schedule, and generally fires on every cylinder these days. ... So it beats me why shares plunged about 16%. ... That makes no sense." (Although other investors might argue that it's the stock's 38 forward P/E ratio that's nonsensical.)

In other cases, though, the answers are obvious. At Alcatel, low revenues and lower profit margins sparked an 18% short-circuit in the stock price Thursday. Deckers dropped a day later after having to admit that a mild winter did indeed affect Uggs sales. (Ahem. As predicted.) And TriQuint Semiconductor -- which apparently still hasn't figured out how to generate positive free cash flow from its business -- suffered a 13% sell-off after warning that it plans to miss estimates next quarter as well.

Last but not least, we come to the featured five-star stock of the week: Ceradyne.

The bull case for Ceradyne
Like so many of its companions on the list this week, Ceradyne has only itself to blame for the 15% drop in share price it experienced Tuesday. The company missed on both revenues and earnings in Q1 and guided down for the rest of this year's numbers as well. Nevertheless, investors began cautiously creeping back into the stock Friday, sending shares up more than 4%. Why?

CAPS member thenatural24 likes the stock's "reasonable price, solid balance sheet and diversification from a shrinking industry (defense) to growing ones (oil and solar) over the next several years."

And mat05 agrees that moving into the energy realm was a "smart move" and also agrees that the company has a "nice peg" ratio.

Perhaps best of all, DoctorCJ argues that Ceradyne today "is the industry leader in high tech ceramics with no competition within sight." Our CAPS member continues: "The new materials they have can do things that add value to the energy industry that 5 years ago were considered economically impractical to pursue."

What you really have to like about Ceradyne, though, is the very high quality of its reported earnings. Oftentimes, companies that report strong "GAAP" accounting profits turn out to be not nearly so profitable when it comes to counting up the actual cash dollars they can put in the bank. (Think: the solar industry.)

Fortunately, that's not a problem Ceradyne shares. Over the past five years, as Ceradyne racked up $367 million in total GAAP profits, the company's bank account swelled accordingly, with $388 million in positive free cash flow. And even after a quarter that some would call disastrous, Ceradyne continued to impress on the free cash flow front. Over the past 12 months, Ceradyne's nearly $68 million in free cash flow more than backed up every penny of its claimed $64 million in "net income."

Foolish takeaway
As a result, post-sell-off, Ceradyne now sells for less than 9.8 times trailing profits but only 9.2 times trailing free cash flow -- and it has more than $185 million net cash in the bank. That works out to an enterprise value-to-free cash flow ratio of just 6.5. Not bad for a company that most analysts feel confident will soon return to 8.5% long-term profits growth, and one that pays a 2.4% annual dividend to boot.

As bad as last week's news was, at prices this low I have no doubt Ceradyne will soon bounce back. That's why I've publicly recommended the stock on CAPS. That's also why I stand by my recommendation today.

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