If you ask me, shares of Vonage (NYSE:VG) are looking quite tasty right now. After the company’s recent earnings report, I’m tempted to catch this falling knife.

Oh sure, I know it sounds crazy. Vonage has never reported a profit, is facing dangerous lawsuits, and has stopped growing. The company’s stock chart made the S&P 500 look good over the past year -- or since the 2006 IPO. And its momma is so ugly ...

This stock couldn't get any love if you slathered it in pheromones and dropped it off at the annual Stock-Lovers' Beach Bonanza. The flaws are plain to see.

Take me down to the Turnaround City
However, Vonage's detractors are missing the big picture. Here's why I think the stock is poised to recover with a bang from its current penny-stock status:

  • Improving earnings. Yes, Vonage is still a habitual money-loser and cash-burner. But the times are a-changing. Vonage lost $0.41 per share last year, but $1.72 per share in 2007. And about half of the losses in 2008 came from early repayment charges when the company restructured its debt.

  • Positive cash flow from operations. Yep, Vonage reported $0.66 million of positive cash flow from operations last year. That's a first for Vonage, and way better than last year's $271 million of outflowing cash from operations. To be fair, though, after accounting for capital expenditures, the company still posted healthy negative free cash flows for the year.

  • Attractive business in a downturn. What Vonage does: Helps its customers save money on their phone bills. It's kind of like the Wal-Mart (NYSE:WMT) or Family Dollar (NYSE:FDO) of residential phone plans, except that a Vonage line comes decked out in fancy extras, too. The company posted a slight net subscriber loss last quarter, but the thriftiness of Vonage’s service should turn that trend around as the recession continues.
  • Legal woes are over. Verizon (NYSE:VZ) settled its patent infringement lawsuit against Vonage last year. So did AT&T (NYSE:T) and Sprint (NYSE:S). Those were the dangerous suits -- the ones that could have put Vonage out of business and put legal limits on its marketing and growth efforts.
    Sure, there are other suits still hanging around like unwanted dinner guests. That's just life in American business, though -- even the universally loved Berkshire Hathaway (NYSE:BRK-B) faces several lawsuits and investigations at any given time. Vonage's major legal concerns appear to be in the rearview mirror.

  • Nobody cares. Vonage gets absolutely no attention on Wall Street anymore. I can only find one analyst with an opinion on the stock. And on last week’s conference call, the Q&A section was nothing but chirping crickets and tumbleweeds. This stock is our little secret, Fool.

I'm researching going in as soon as our Foolish disclosure policy will let me. Even if the knife falls a little bit further, the rebound should be well worth that pain.

Further Foolishness:

Wal-Mart Stores, Sprint Nextel, and Berkshire Hathaway are Motley Fool Inside Value picks. Berkshire Hathaway is also a Motley Fool Stock Advisor recommendation, and The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like. The Motley Fool is investors writing for investors.