Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixing a cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly has its attractions, but you have 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 and measure which knives have fallen the farthest. Then we'll call on CAPS to ask which -- if any -- of these stocks 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. Recent price and 52-week high 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-and-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.

CAPS members see two companies worth fishing out of the drink this week: Marvell and S&W. Of the two, I'm more familiar with Smith & Wesson -- and its inventory problems. But today, let's focus on:

The bull case for Marvell Technology

• Back in May, CAPS All-Star camistocks predicted: "[W]e have seen the lows in the current cycle for semiconductors. Buy them now while everything seems gloomy and sell them in 1-2 years when earnings will be just fabulous." But that sounds to me like an argument as much in favor of buying Intel (NASDAQ:INTC) or Advanced Micro Devices (NYSE:AMD) as Marvell. Can anyone make a case for buying Marvell in particular, as opposed to just semis in general? 

• Well, yes. Fellow All-Star torpedoal made such a case last summer: "The supplier of Wi-Fi parts for the [iPhone] will bring a stream of revenue to this company and will improve the bottom line profit outlook in the years ahead. A long term investment stock is very cheap at these levels, especially as the [iPhone] proved to be the ultimate telephone/internet device or gadget."

• Fast-forwarding from last summer to last week, we've all heard by now the bad news out of Research In Motion. And given the weak guidance, you might be surprised to find Fools as bullish on Marvell as they are bearish on RIM. But as greatstockhunter explained in June, "No matter [if Apple (NASDAQ:AAPL)] wins or [Research In Motion] wins, Marvell Tech Group is going to win coz it makes tranceivers for both companies' smart phones."

Aha. So we're looking at a high-tech pick-and-shovel play here. Now I see. But what about torpedoal's statement that Marvell is cheap? Even assuming it was true last summer, is it still true today?

I think it is. And considering that torpedoal is already down 25 points or more on that pick, I suspect that Marvell is even cheaper today. Reviewing the numbers, here's what I see:

• First off, Marvell has a scary price-to-earnings ratio -- it sells for 44 times trailing earnings.
• Not to fear, though, because if you look past the GAAP gobbledygook, you'll quickly see that a lot of Marvell's free cash flow isn't yet getting reflected on the income statement.
• How much is "a lot?" Well, according to Capital IQ (a division of Standard & Poor's), Marvell generated a good $405 million in free cash flow over the past 12 months. That's enough to give the stock a price-to-free cash flow ratio of less than 15 -- and an even cheaper enterprise value-to-free cash flow ratio. Marvell looks pretty flush in the bank-account department.

Relative to the nearly 20% long-term growth rate that most analysts are projecting for Marvell, I have to say these valuations look mighty attractive. Good enough to bounce? Quite likely, yes. Good enough to buy? Also yes.

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Marvell Technology -- or even what other CAPS players are saying. We really want to hear your thoughts. Head on over to Motley Fool CAPS, and tell us what you think.

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