5 Superball Stocks

"'Don't catch a falling knife' ... 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."

So runs the thesis of my recurring Fool column "Get Ready for the Bounce," in which we search among the wreckage of Mr. Market's overturned cutlery drawer, hoping to find future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a potential bouncer?

I say nay. Sometimes, stocks fall far in far less time than a year -- and like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we're going to look at a few equities that've suffered dramatic drops over the past week. With a little help from the 165,000 (and growing!) members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Companies are selected by screening on finviz.com for abrupt 5% 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.

Five super falls -- one superball
Another week, another drop in the Dow. But was it for good reason this time? In the case of some stocks, it probably was.

Take Halliburton and Schlumberger, for example -- both off by about 7% for the week. (And if you cannot guess why, here's a hint.) Similarly obvious, even if it didn't get as many headlines, was the reason American Eagle got clipped last week. The company's lackluster back-to-school forecast has analysts cutting estimates for this quarter's earnings, costing American Eagle shareholders a good 13% last week.

MasterCard's a bit trickier. This one's down nearly 6% in response to a relentless congressional assault on bank interchange fees. As a few of my Foolish colleagues have pointed out, this financial industry reform is primarily targeting the profit earned by card-issuing banks such as JPMorgan Chase and Bank of America. The fear, however, is that there will be knock-on effects that hurt profit at MasterCard and Visa.

And now, back to the obvious.

American Science & Engineering
No sooner had AS&E released blockbuster results for its fiscal fourth quarter, than it found its bull thesis busted; once again, it's the government to blame. Last week, U.S. Customs and Border Protection (CBP) canceled an $11.8 million order for the company's MobileSearch HE cargo and vehicle scanning system. In so doing, it forced AS&E to remove an equivalent sum from its backlog tally. But does the loss of one order for less than 5% of annual revenue justify the 6% haircut AS&E endured last week?

Not according to CAPS member acosta21, who places greater emphasis on the: "MILITARY CONTRACTS, TSA CONTRACTS these guys are" signing, and predicts the stock will "break out big if these contracts hold."

The Fool's own TMFBreakerJava (a CAPS All-Star, no less) agrees that: "This company is gaining traction with its advanced security and surveillance equipment. This is a growth industry in a world at risk for terrorist violence and organized crime."

And as fellow All-Star ZenWarrior01 pointed out last year, the president's "[s]timulus plan calls for port security... [AS&E] is the play which should get much of that spending."

What's that you were saying 'bout security?
But if the stimulus plan calls for port security, one wonders, what is CBP up to, going and canceling its order for an AS&E system designed to increase port security? The answer, I'm afraid to say, is "no one knows for sure." As AS&E confides, CBP has every right to cancel contracts for convenience and give no reason for its action.

The good news, though, is that there's therefore no reason to believe that AS&E has done anything wrong, or that CBP has any problem with the MobileSearch product itself. Rather, the company indicates that CBP will "reevaluate the proposals in the format of a Corrective Action process" -- a procedure designed to verify to the government's satisfaction that it's getting the most bang possible for the taxpayer dollars it's spending.

Speaking of dollars
An investor in AS&E might also want to know how much bang today's stock price offers, and to my Foolish eye, this company is just loaded with potential.

While the headline 18 P/E may not look like much relative to AS&E's projected 14% growth rate, this company generates significantly more free cash flow than its income statement lets on. As a result, AS&E sells for roughly a 14.6-times multiple to free cash flow. Remove the firm's $172 million in net cash on the balance sheet from the equation, and the stock looks even cheaper at an enterprise value of only 10.7 times free cash.

Foolish final thought
The attempted bombing in Times Square last month illustrates the need for AS&E's security products and, while CBP's canceling of a single order may seem frustrating, it's important to keep your eye on the ball here: The government is committed to improving bomb and contraband detection. AS&E is one of only a handful of players manufacturing products suited to this mission (General Electric (NYSE: GE) and L-3 Communications (NYSE: LLL) are also members of this exclusive club). So, the growth prospects are there. Investors need only be patient and wait until Wall Street sees them.

And maybe lend the Street one of AS&E's Backscatter scanning devices to help with the visualization.

Got an opinion on AS&E? Tell us about it on Motley Fool CAPS.