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 140,000 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. 

Five super falls -- one superball
Last week was a rough one for all five of the companies named above, although the reasons varied widely:

• Melco Crown took a tumble on no news of note ...
• ... while Brocade investors can thank Hewlett-Packard's (NYSE:HPQ) decision to buy 3Com, and not Brocade for the latter's collapse.
• TCS shot itself in the foot when it issued potentially dilutive, convertible debt.
• And Chinese stars FUQI and China Digital TV can blame their own weak earnings news for their respective sell-offs.

And yet both China Digital and FUQI (and for that matter, Melco Crown as well) still enjoy strong support from the 140,000-plus lay analysts who make up Motley Fool CAPS. Let's find out why -- and specifically, let's find out why investors are so quick to forgive China Digital's disappointment:

The bull case for China Digital TV
Fellow Fool TMFSysun introduced us to China Digital back in April as:

[A] Chinese company which makes smart-cards, a key component in the set-top boxes which every Chinese television will need to hook up to in order to link into a digital cable network. With the government mandated conversion to digital cable by 2015, CDTV has a huge market to potentially capture. As CDTV is already the majority market leader (51% of market share and growing), it is very unlikely for the company to end up with anything less than 50% of the future smart-card market.

In addition to the market share argument, CAPS All-Star latimerburned points out that China Digital has: "Lots of cash on the balance sheet. Great margins."

Last but not least, fellow All-Star investor sandvig lends us a bit of historical perspective on the company's prospects: "I remember the excitement when people in our neighborhood first started getting color TV. Who doesn't watch TV? I have to think that as the consumer class in China grows, there will be a place for digital TV somewhere."

Regrettably, I too remember the advent of color TV sets. (And the travesty when Ted Turner proceeded to make use of 'em by colorizing every old B&W flick he could get his hands on.) But that's neither here nor there. What we really want to know is whether China Digital TV can bounce back from a weak third quarter, and replicate the profits dynamo that was "Color TV," without the unpleasant side effects.

Well? Can it?
I actually think it can. Sure, last week's earnings report was a bit of a disappointment -- revenues down 28%, and profits down 43%. But step back from the small screen for a moment and consider the bigger picture.

Over the last few years, this company has rapidly become a major player in this industry. Locally, the company counts such Southeast Asian powerhouses as Huawei, LG, and Samsung among its clients, while China Digital also keeps Western customers like Motorola (NYSE:MOT) and Intel (NASDAQ:INTC) on speed-dial.

Profits have surged despite recent hiccups, as 2004's money-losing year grew rapidly toward the $43 million-peak China Digital achieved last year -- and unlike so many fast growers, China Digital's cash profits are keeping up the pace quite nicely. While we don't yet have up-to-date figures for this year, 2008 saw the company generate $37.4 million in free cash flow, up 15% year-over-year and up 81% from 2006.

Foolish takeaway
Put it all together, and what we're looking at today is a stock priced at roughly 10 times earnings and free cash flow, expected to grow these profits at 10% per year over the next five years... and to top it all off, China Digital is sitting on a cash hoard that comprises over 65% of its own market cap. Can you say margin of safety?

Time to chime in
Of course, skeptics are just as free to say: "What's the catch?" -- and to assume that if a stock is priced this low, there must be a catch of some sort, somewhere. Speaking of which, if you're one of those skeptics, then here's your chance to speak up. Don't let it go to waste.

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