5 Superball Stocks

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When stocks fall fast and far, they sometimes set themselves up for remarkable rebounds. The following equities suffered dramatic drops over the past week. With help from the 180,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back:

Companies

 

How Far From 52-Week High?

Recent Price

CAPS Rating

(out of 5)

Emerson Electric (NYS: EMR) -21%$49.09*****
Waste Management (NYS: WM) -20%$31.49*****
Level 3 Communications (NAS: LVLT) -18%$2.18***
Alcatel-Lucent (NYS: ALU) -39%$4.05**
JDS Uniphase (NAS: JDSU) -55%$13.15**

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
Ol' Mr. Market lost his temper last week, and a lot of investors felt his wrath. The S&P 500 ended down 4% by close of trading Friday -- and that wasn't even the worst of it. If you owned any of the five stocks named above last week, you're significantly poorer for it today. So what went wrong?

In a word: Earnings. Beginning at the bottom, tech favorite Juniper Networks (NAS: JNPR) reported a decline in profits last week, and warned of "near-term market weakness" in the optical networking industry. That news prompted a broad and deep sell-off in shares of almost anyone who had anything to do with selling telecom equipment. JDS Uniphase, Alcatel-Lucent, Level 3 Communications -- you name it, they lost market cap last week.

And not just them. Waste Management got trashed Thursday after reporting earnings a penny short of Wall Street's expectations. (Horrors!) Yet according to management, the company's still on track to generate $1.25 billion in free cash flow this year -- pricing the stock at just 12 times FCF. When you consider that WM is expected to grow 10% per year over the next five years, and pays shareholders a 4.2% annual dividend, the discount on this stock looks pretty compelling ...

Fact is, I'd probably be urging you buy Waste Management today, if not for one thing: The fact that there's an even bigger bargain this week's list. Selling for 15 times free cash flow and pegged for 15% long-term earnings growth (with a 2.8% dividend to boot), Emerson is arguably even cheaper than Waste Management -- and I'm not the only one who thinks so.

The bull case for Emerson Electric
CAPS member Joulesh calls Emerson "a great balance between value and growth. Nice share price to owner earnings ratio, great ROE, nice growth in earnings, low P/E and GREAT CEO. This is one to own for the long-term and load up on during the dips."

jareda agrees, and argues that this "global leader in innovative technologies" will profit from helping "companies reduce power consumption and increase energy efficiency (reduce energy costs)." For investors, "Emerson's solid dividend and long history of raising dividends, provides a of a safety net an overall declining market."

To top it all off, CAPS member tmcg1788 points out that Emerson boasts a "high ROA, good profit margin, and low, well managed debt." (About $3.6 billion, net of cash.)

But if Emerson's such a great company, why is its stock sagging? Again, the answer seems to be earnings. Emerson doesn't report until tomorrow, but last week the company gave us a sneak peek at Tuesday's news. In an SEC filing, Emerson warned that it's seeing a "weakening of general business activity in June and July," and expects its industrial-related businesses may "eventually ... soften due to the generally poor economic environment." This raises the possibility that guidance will come down in future quarters -- and it seems investors aren't waiting around to hear that worry confirmed. They're selling ahead of earnings ... but are they right to do so?

Emerson: Buy the numbers
I don't think so, and I'll tell you why not: Yes, Emerson is warning that times could get tough in future quarters. Right now, though, Emerson is still posting solid results. Its industrial businesses are "still strong." Best of all, the weak U.S. dollar that's been boosting results for American manufacturers like General Electric (NYS: GE) recently is doing great things for Emerson as well. According to management, "currency exchange rates positively affected orders by approximately" 7% in the second quarter.

To my mind, this all argues in favor of Emerson reporting strong results tomorrow. Sure, there's a risk that business may soften going forward. But that risk is always there, and it's there for many companies in the economy. As for Emerson, I think today's stock price -- 15 times free cash flow, with a 15% long-term growth rate and that hefty 2.8% dividend -- more than prices in the risk. Fact is, I think the stock's downright cheap, and could bounce on pretty much any good news at all.

Disagree? Feel free. If you've got a different opinion of Emerson Electric, here's your chance to shout it out. Click over to Motley Fool CAPS right now and tell us what you think.

At the time this article was published Fool contributorRich Smithdoes not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 561 out of more than 180,000 members.The Motley Fool owns shares of Waste Management.Motley Fool newsletter serviceshave recommended buying shares of Emerson Electric and Waste Management, as well as shorting Juniper Networks. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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