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 135,000 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 10% 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
Each of these companies took a terrific tumble last week. General Electric's (NYSE:GE) stem-cell partner Geron stumbled Monday, when the FDA put a hold on clinical trials of the firm's spinal cord treatment "GRNOPC1." (You may recall that it was this trial that originally sent Geron's stock flying back in January.)

The other stocks' stories were less exotic. Sears's decline stems from the firm's surprise admission of loss in the second quarter. Similarly with Suntech and its disappointing earnings. But neither Suntech nor First Solar were helped any by a series of analyst downgrades in the solar sector last week. Long story short, the solar slide continues.

What really interests me, though, is the inexplicable decline in share price at Harbin Electric. The company reported no bad news of note last week. To the contrary, Harbin just completed a follow-on stock offering which yielded nearly $108 million in additional cash. New shareholders snapped up the offered shares for $16 a pop -- yet the stock now trades just north of $14. In this, Fools see opportunity.

The bull case for Harbin Electric
In May fool503x was attracted to Harbin by its "22% net profit margin, 14% ROE, 0.2 debt ratio, lots of cash on hand, and ... insider holdings are presently greater than 50%." While alert to the fact that "profit margins have inched down every year a bit as this company has increased in size, and R & D costs increasing," fool503x remains optimistic and believes "these issues have appropriate focus from management."

As is CAPS All-Star johngg123, who points out that "when you back out the cash per share (after the offering) this stock is ridiculously cheap... and that is not even factoring in the nice growth rate."

How cheap, you ask? bradford86, who ranks in the top one-quarter-of-one-percent of all investors tracked on CAPS, affixes a fair value ranging from $13.70 to $24.20 per share, with a "Conservative probable valuation" of $18.60.

If bradford86 is right, therefore, this stock has better than 30% upside to it -- and yes, I do think he's right. Consider that over the last 12 months, Harbin has generated more than $41 million in free cash flow, against reported GAAP earnings of just $17 million. Weighed against its $373 million enterprise value, therefore, Harbin now sells for about nine times its free cash. But all those numbers were before the company's recent secondary offering.

And by the way, johngg123 is absolutely right about the effect of last week's stock offering on this valuation. Add the $108 million haul Harbin took in last week to its last-reported cash hoard, then subtract the firm's long-term debt, and Harbin is now sitting on roughly $136 million in net cash -- fully one third of its market cap. The way I look at it, if Harbin can achieve even half the long-term growth rate that analysts expect it to produce (18%), the stock's a steal at these prices.

But it's even better than that, Fools. While higher-profile Chinese shops like Baidu.com (NASDAQ:BIDU) or New Oriental Education may enjoy tangential benefits from China's industrial stimulus package, Harbin's work on electric motors for the automotive, industrial, and train industries seems directly positioned to benefit from the program. Given this, I see no reason why Harbin would grow slower than analysts expect. To the contrary, I see every likelihood that Harbin will meet or exceed expectations -- and every reason to buy the stock today.

Time to chime in
But hey, that's just my opinion. And the aim of this column isn't just to tell you what I think about Harbin Electric -- or for that matter, even what our CAPS members think. What we really want to know is what you think about the company. If you've got an opinion, we've got a place to tell people about it.

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