Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon the cutlery mixing in my metaphor there.) 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. That's where Motley Fool CAPS comes in.

Today, we once again stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. 

Let's meet today's list of contenders, drawn from the latest "New 52-Week Lows" list at MSN Money:

Companies are selected from the "New 52-Week Lows" list published on MSN Money on the Saturday following close of trading last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

"If there's one good thing about a broad-based market sell-off, it's that you find a lot of terrific companies getting the ol' baby 'n' bathwater treatment. Tossed out on their rosy little bums as if they were bums of another sort. You know -- just know -- that some of these babies are gonna bounce right back once the suds subside..."

I've been opening the analysis portion of this column with that line for longer than I care to remember at this point. But never -- not once -- did I imagine we'd see the theory so thoroughly illustrated as it was last week, when two days of frantic selling (with barely a breather in between) were followed by two days of nearly-as-frantic buying. Wow.

But heck, if Mr. Market wants to go out of his way to prove me right, I'm not going to look this proverbial gift horse in the mouth. Hard-hit stocks offer the potential for hard-hitting profits. QED. So let's proceed straight to reviewing the bull thesis on this week's hardest-hit-yet-most-loved stock in the world. Literally. This week, we're making a run south of the border to examine ...

The bull case for Gruma S.A.B. de CV:

• PrincetonAl introduced us to this company way back in the summer of '06: "Boring business, located in Mexico, with currency and Venezuelan risk in the short-term. In the long-term, a growing market in US, dominant market share in an industry (food) that rewards dominant market share and scale players, selling into a trend (growing Hispanic market, growing market for Hispanic food), with other expansion opportunities globally. Seems like a good opportunity to me. ... Boring could be good."
• But the U.S., it appears, is only Part I of this growth story. MrMarket99 gave us Part II last February: "The company continues to expand its operations in the U.S. and internationally. Its new plant in Shanghai, China along with new plants in Australia will help Gruma grow in Asia. There's also plans for a plant in Japan and Russia down the line." Uh-oh. Mexican food, combined with the ever popular "China is a 1.3 billion person market" thesis? This is starting to sound downright tasty.
• "Story" stocks are all well and good. But what about the valuation? Is this one cheap enough to own? CAPS All-Star doc324 took a look at Gruma a couple of months ago, and thinks it is: "Reasonable debt to equity, good p/e to eps growth, good revenue growth, low end of last 52weeks and consistently profitable."

Of course, "reasonable" is in the eye of the beholder. Let's see if we can't firm that opinion up a bit, why don't we? Reviewing Gruma's financials, I see first of all the P/E that got doc324 so excited: 6. That's right. Six. Relative to analysts' long-term projected growth of 10% per year, that looks quite attractive ... until you notice that the "analysts" projecting the growth consist of one guy and a slide rule, and that these projection(s) have been off by an average of 55% per quarter over the last four quarters.

On the other hand, our lonely, anonymous analyst is generally off by guessing on the low side, surprised on the upside when Gruma reports massively better numbers than he (or she?) was expecting.

And on the third hand ... hmmm, I'm out of hands here, so let me tick off a few more negatives on my toes:

• Free cash flow: There ain't any. To the contrary, Gruma's burning cash.
• Competition: Making tortillas isn't exactly rocket science. Anyone -- and by anyone, I mean even your humble Foolish author here -- can theoretically mix up a batch of cornmeal and start competing with Gruma. As of today, the ranks of competitors include Kraft (NYSE:KFT), Flowers Foods (NYSE:FLO), and General Mills (NYSE:GIS).
• Dependence: Meanwhile, Gruma's profits depend in large part on the price of grain that suppliers like Archer Daniels Midland (NYSE:ADM) charge it, and farther up the food chain, the price of the fertilizer that firms like Potash Corp of Saskatchewan (NYSE:POT) and Mosaic (NYSE:MOS) charge the farmers who sell to ADM.

Time to chime in
Still, much of the above has been true for a long time, while none of the above has prevented Gruma from growing its profits at the barn-burning clip of 35% per year over the past five years. Personally, I have my doubts as to how long Gruma can maintain that torrid pace.

But never mind what I think. What's your opinion? Post it on CAPS, and let the world know if you believe that Gruma will bounce back.