5 Superball Stocks

"'Don't catch a falling knife' ... 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 runs the thesis of my recurring Fool column "Get Ready for the Bounce," in which we search among the wreckage of Mr. Market's overturned cutlery drawer, hoping to find future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a potential bouncer?

I say nay. Sometimes, stocks fall far in far less time than a year -- and like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we're going to look at a few equities that've suffered dramatic drops over the past week. With a little help from the 145,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.

Five super falls -- one superball
If you own any of the stocks named above, chances are you didn't enjoy last week very much. From the bottom up, we saw SunPower get crushed on news of accounting snafus, while both Sinovac and Illumina got spanked, seemingly for no reason at all. Isis Pharmaceuticals actually had good news, announcing successful trial results for the mipomersen cholesterol drug it's developing in cooperation with Genzyme.

And our top-ranked stock this week? Jacobs Engineering sank under the weight of weak sales, weaker earnings, and weakest of all -- guidance. Predictions of 2010 earnings coming in as low as $2 missed Wall Street expectations by a mile. So why would anyone want to own this stock, much less give it a full, five-star rating?

We're about to find out.

The bull case for Jacobs Engineering
CAPS All-Star mrindependent leads the bulls' thundering herd with this snort of defiance. Weak guidance notwithstanding:

Jacobs Engineering is a solvent, well run company with excellent prospects and $8.54 per share net cash on hand. Expected earnings for the 09/10 fiscal year are $2.30 per share, which is unusually low for this company. ... Jacobs Engineering remains well positioned for the future with a diversified base of private and public sector customers. Currently selling for 1.8 times book value, which is far below its typical p/bv ratio of 3. The current price/sales ratio is 0.4, which is much less than the company's "typical" p/sales ratio of 0.6.

Fellow All-Star 00100 gave Jacobs the thumbs-up this past summer, praising the company's: "[g]ood cash flow," "[h]igh growth rate," and "no debt."

Hard times aside, between the cash Jacobs' already has, and the new cash flowing in the door, JunkieForGames argued that this company has "[e]nough cash to ride out downturns and get back on track."

I agree. While there's no disputing that 2010 looks like a "bad" year for Jacobs, even after the projected 30% year-over-year drop in annual earnings, this stock will still be selling for 16 times such "forward" earnings -- reasonable for a company that most analysts expect to grow at 15% annually over the next five years.

What's more, all of this is predicated on educated guesswork about what might happen to Jacobs next year. Roll the film back a bit to examine how the company has in fact performed historically, and the stock looks downright cheap. Jacobs sells for barely 11 times this year's earnings, right in line with rivals Fluor (NYSE:FLR) and Foster Wheeler (NASDAQ:FWLT). But in contrast to those better-known names, Jacobs has boasted cash-generating prowess far in excess of what its GAAP numbers suggest. At Jacobs, free cash flow for the year that ended with the quarter ended in June exceeded reported net income by nearly 30%. That puts the price-to-free-cash ratio at 8.

Time to chime in
Final point: All of these valuations ignore the effect of Jacobs' mammoth net cash hoard -- more than $8 per share, as mrindependent pointed out. This cash not only will give Jacobs the little bit of extra cushion it may need to survive a bumpy 2010. It also serves to push the company's enterprise value deep into bargain territory.

Or so I say. Now it's your turn to chime in. Click over to Motley Fool CAPS now, and tell us what you think about Jacobs Engineering.

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