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 180,000 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 5% 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
As January draws to a close, 2013 is already off to a strong start for stock investors. Last week, the S&P 500 tacked on an extra 1.1% and recrossed the 1,500 mark for the first time since October of '07 ... but not everybody's cheering.

Especially dour are shareholders of the nearly 2,200 stocks that actually lost money last week. Stocks like the five named up above. But what is it, exactly, that's been holding these companies back?

It's sometimes hard to tell. Take bottom-of-the-lister Molycorp. Its shares crashed big-time Wednesday, when management revealed that funding its capital investment program would require it to issue hundreds of millions of dollars worth of new debt and equity, diluting its existing shareholders in the process. But on Friday, when the company actually announced it was going ahead with the program -- the shares popped! Not enough to get Moly back to where it started, granted, but still. It was a pretty strange situation.

Other times, it's downright near impossible to figure out what investors are thinking. For example, Arena shares tumbled early last week on worries that its Belviq diet drug won't be approved by the European Medicines Agency's Committee for Medicinal Products for Human Use (CHMP). Well and good. But why did VIVUS -- maker of competing diet drug Qsymia, which also failed to win CHMP approval -- also fall last week? You'd think hard times for a competitor would be good news for VIVUS -- but apparently, you'd be wrong.

And of course, Antares Pharma shares shed 5% of their value last week for no reason whatsoever. No bad news. No good news. No news at all.

The bull case for II-VI
Which brings us to the one stock on today's list whose decline and fall last week actually makes perfect sense -- and a stock that may nonetheless be finally approaching buyability: laser components maker II-VI (pronounced "two-six"). Last week, a 1% slip in revenues turned into an 8% decline in profits. Combined with a weak forecast for fiscal Q3 earnings, that sparked a 10% sell-off in the shares. Nonetheless, CAPS members are optimistic that II-VI can turn this around 180 degrees, and bounce back.

All-Star CAPS player and all-around good Fool TMFOrangeblood points out that a single miss doesn't change the fact that "II-VI has high barriers to entry" on its side, plus "a sound, proven, long-term business model; and the possibility for strong growth in its target markets."

Fellow All-Star awallejr likes the company's "nice clean balance sheet," which boasts $38 million more cash than debt. 

And Hoos1213 calls the company an "innovative business that has a lot of promise to it."

I agree -- especially if you remember that "promise" implies an ability to deliver at some point in the future.

Right now, you see, II-VI still looks a little pricey based on its 21 P/E ratio. The good news is that the company is actually cheaper than it looks, generating about $73 million a year in free cash flow ($20 million more than its GAAP earnings suggest). The better news is that with long-term growth predicted to average 13% a year, II-VI is fast approaching a valuation at which it might be worth buying.

Foolish takeaway
For now, the company's $1.1 billion market cap is still high enough that at 15 times annual free cash flow, II-VI is only fairly priced. Give investors a little time to get discouraged over the stock's poor performance relative to the S&P 500, though -- give them some time to drive the stock price down even further -- and II-VI could soon be selling at a real discount to its true worth.

And that, dear Fools, will be the moment II-VI turns into a real superball of a stock. For now, watch and wait.