"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've got 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, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- 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 on WSJ.com:


52-Week High

Recent Price

CAPS Rating

(5 max):

Union Pacific  (NYSE:UNP)




Boeing  (NYSE:BA)








United Parcel Service (NYSE:UPS)




Southwest Airlines (NYSE:LUV)




Companies are selected from the "New 52-Week Lows" list published on WSJ.com on the Saturday following close of trading last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Knives and knaves
The carnage continues: 333 NYSE-listed stocks closed out the trading week Friday at their lowest prices in a year. Likewise on the Nasdaq, 290 stocks hit their nadir on Friday.

Investors, burned so badly already, seem to be losing hope that a recovery is just around the corner -- or even around the block. I mean, just look at some of the names above: Boeing, FedEx, UPS, Southwest. Two of these companies are already Fool recommendations (United Parcel Service is a Motley Fool Income Investor pick. FedEx holds a slot in the Motley Fool Stock Advisor port). Regardless, investors seem frightened of investing in anyone who's got anything to do with moving people and goods around the globe -- the very definition of global commerce.

Well, anyone but Union Pacific.

The bull case for Union Pacific

  • Why buy a railroad? We lead off the bull arguments with this gem from the ever-quotable sandvig (writing in October): "Mater artium necessitas - Necessity is the mother of invention. How else do you get the coal to the power plant?"
  • I'm guessing that was a rhetorical question, but CAPS All-Star Vanheezy18 answers it directly: [CSX, Norfolk Southern (NYSE:NSC), (Burlington Northern (NYSE:BNI)], and [Union Pacific] basically hold a oligopoly on American Railways -- making 80% of the total railway profit. Whereas the economy will temporarily hurt, railways are better positioned to weather the storm than trucking, which means when the market rises, railways will have even more business and more profit."
  • But why should we prefer Union Pacific over its peers? After "looking at all the big US [railroads]," All-Star investor Alex1963 argues: "[Union Pacific and the other railroads] ... have good moats ... in that if rail is the preferred mode you can't just build a competing [railroad]. Buffet likes 'em and I can see why.:  Long term competitive edge and currently beat down by the economy not because their is anything wrong with them + a strong dividend history and good mgt ... and margins overall." In the final analysis, Alex1963 concludes that Union Pacific "has the best debt ratios."

No argument there. With debt to equity currently standing at 58%, Union Pacific handily trumps the competition. Every other major railway on the continent carries a heavier debt ratio than does Union Pacific. CSX is the worst of the bunch, leveraged more than two-thirds as heavily as Union Pacific. But as good a reason as that provides to prefer Union Pacific over its rivals, I'm not convinced it offers a compelling reason to buy Union Pacific, period. Here's why:

At first glance, the stock does look attractively priced. Union Pacific carries a trailing P/E of just 7, which looks attractive relative to analyst predictions of 12.5% annual growth for the next five years. And then there's the Buffett factor to consider. The Berkshire Hathaway chairman was buying railway stocks hand over fist back when oil was hitting its highs.

But while I tremble at the prospect of breaking with Buffett, I just don't see the value here. You see, Union Pacific's low P/E is a function of a quirk in GAAP accounting, which allowed the firm to report $2.3 billion in "profit" last year. But in fact, this incredibly capital-intensive business generated much less free cash flow than that number implies -- barely $900 million. Viewed from this perspective, the stock's enterprise value stands at a lofty 29 times free cash flow. That’s a price that, in my opinion, the 12.5% growth rate simply cannot support.

Time to chime in
Of course, to quote the estimable Dennis Miller: "That's just my opinion. I could be wrong." Maybe President Obama's stimulus plan will jump-start our economy such that Wall Street's predicted growth rate will pale in comparison to reality. Maybe (OK, certainly) Buffett knows more about the railroad business than I do, and I'm totally misreading the situation.

And if that's so, then here's your chance to set me straight. If you see something to like in railroads right now, then click on over to Motley Fool CAPS, and tell me why you think Union Pacific's a buy.

Motley Fool CAPS : It's fun, it's free, and it just might make you famous.

United Parcel Service is an Income Investor recommendation. FedEx and Berkshire Hathaway are Stock Advisor picks. The Fool owns shares of Berkshire Hathaway.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 583 out of more than 125,000 members. The Fool’s disclosure policy has brought some corn for popping.