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'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 "52-Week Lows" list at WSJ.com:

Companies are selected from the "New Highs & Lows" lists published on WSJ.com on Thursday and Friday last week. 52-week high and recent price provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

All good things must come to an end
Ah, well. I suppose it was too good to last. For the time being, at least, the market's perpetual sell-off has gone on Spring Break, and with the market in rebound mode, we're fast running out of screaming bargains.

Now that the screaming has stopped, CAPS members are being forced to listen carefully for more "whispered bargains" -- but the good news is that we're still finding a few. Take one of the top-rated picks on today's list, for example. It's hard to think of a more effective conversation killer than the subject of "old age homes." Regardless, a lot of Fools are saying Sun Healthcare looks mighty attractive here at its 52-week low. In recommending the stock, they're standing shoulder to shoulder with institutional investors such as Fidelity Management, which has put Sun in its portfolio alongside sexier names such as PotashCorp (NYSE:POT) and Mannkind (NASDAQ:MNKD).

We can only guess what attracted Fidelity to Sun Healthcare, but as for the rest of Fooldom, they've come right out and told us. Let's listen in now as they lay out for us ...

The bull case for Sun Healthcare
As far back as June 2007, nullzero66 spotlighted Sun as being a "[s]teady company with high growth and undervalued. Increase in elderly will benefit this company greatly in the long term." harrison5048 agrees, pointing out that "baby boomers turning into seniors... [is] good for nursing homes, in-home health, outpatient centers." And just a few days ago, rojostyle -- ranked in the top 3% of investors tracked by CAPS, I might add -- chimed in, calling this a: "[g]ood industry to buy into and descent balance sheet."

Before you run off and buy Sun on these guys' say-so, though, let's quality-check these assertions. With 8% annualized earnings growth over the last five years, and predictions that this growth will accelerate to 13% as boomers age going forward, I wouldn't necessarily call Sun "high growth" as nullzero66 did. Still, the growth does seem respectable, and not too fast to be maintained in the future. Moreover, with a trailing P/E that clocks in at a mere 3.1, it's hard to argue that the stock is anything but "undervalued" -- at least on the surface.

Accordingly, my worries about Sun don't begin until I dig into the firm's balance sheet -- the one that rojostyle calls "descent." Problem is, the way I read the numbers, Sun actually carries more than $630 million in net debt, when the market cap is just $360 million. Does that look "decent" to you? It doesn't to me -- but it is pretty clear that the firm is descending farther and farther into debt.

Moreover, I'm concerned that Sun seems better at adding on new debt than at generating the cash necessary to pay off its existing loans. While net income last year came close to hitting $110 million, Sun's actual free cash flow barely topped $45 million. That disparity could signal trouble.

Time to chime in
Will Sun bounce back from its lows? I won't rule out the possibility, but from where I sit, the company needs to make more progress in converting revenue into free cash flow, and paying down its debts, to justify betting on a rebound. Until these problems are fixed, I fear that an investment in Sun carries a real risk of flaming out.

But hey, that's just my opinion. If you see a brighter future for Sun, click on over to Motley Fool CAPS and make your case.

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