Drop-Dead Gorgeous Stocks

"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 goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS. And out the other end comes a list of stocks that have fallen so far, Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even further? Perhaps. If a stock that's fallen for one year straight has headroom, then maybe a stock that's fallen even farther, and longer, has room to soar back even higher -- in which case, an apparently left-for-dead stock could offer us a drop-dead gorgeous entry price. We're going to test that thesis today, starting with five stocks that just hit their five-year lows:

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Thursday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?
Each of the stocks listed above has shed between 35% and 75% of its value over the past year alone, and currently sits at or near its five-year low. Wall Street has left 'em all for dead, and well -- how do I put this gently? -- if you're a stock, and you hit your five-year low on a day like yesterday, then chances are you are a real basket case.

Regardless, Main Street sees the potential for some emergency resuscitation of at least two of these stocks: Mercer International and Health Management Associates. As for which patient I think stands the best chance of recovery, I'll give you a clue. In our hi-tech world of Adobe (NASDAQ:ADBE) Acrobat virtual documents, and Amazon.com (NASDAQ:AMZN) Kindle e-books, which industry has the better long-term growth prospects: Paper pulp, or health care?

Aha. Without further ado, let's start running down…

The bull case for Health Management Associates 

hybridinvestor introduced us to this operator of general acute care hospitals back in December 2006, calling HMA: "arguably one of the best managed hospital chains out there ... These guys do seem to have a knack for buying poorly run hospitals on the cheap and turning them into fairly profitable units that add to the bottom line long-term. No fear that hospitals are going away there either."

Sounds good in principle. Anyone care to elaborate? You there! CAPS All-Star TMTAirborne. What was it you were scribbling back in October? Ah, yes: "2 negatives that i can see, maybe 3 ... federally ran heathcare. Horrible debt, even though it brought on debt to keep buyers away and gave that debt to the share holders. And three, their business model is floundering. They buy hospitals where 'better' hospitals aren't, remodel, bring better management, and make a healthy profit. They haven't done that in awhile."

Well now, that doesn't sound so encouraging. But has HMA made any progress since last year? smallcapbigyield believes it has with this pitch from June: "They focus on the burbs, which is where a lot of the baby boomers are, and they're putting up crushing numbers this year: Net income, first quarter, 2008: $133M ... Net income, annual for 2007: $119M." In other words: "They're finally figuring out how to make money again."

How much money, you ask? Try $136 million in free cash flow over the past 12 months, and 189 million in net profit under GAAP. Those numbers give this stock a price-to-free cash flow ratio of about 8, and a P/E of less than 6.

Pretty tempting in light of analyst projections that have this company growing at an 11% clip over the next five years, don't you think?

That said, there's still the "horrible debt" situation that TMTAirborne highlighted. Right now, HMA's enterprise value-to-free cash flow ratio stands at a much less appealing 31 ratio. So Pay Dirt rec or no, I have to admit I'm a bit leery of this particular stock. True, the industry is destined to grow, and yes, the valuation looks tempting. Just mind the gap between "looks" and "is" on this one, Fools. HMA's not quite as cheap as meets the eye.

Time to chime in
But hey, that's just one Fool's opinion. Maybe you don't find the debt load particularly worrisome? If you've got another point of view, here's your chance to make your case. Just click on over to CAPS and tell us why.

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