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 170,000 members of Motley Fool CAPS, we'll see whether any of them have the potential to bounce back:

Company

 

How far from 52-week high?

Recent Price

CAPS Rating

(out of 5)

Western Refining (NYS: WNR) (32%)$14.83*****
DryShips (NAS: DRYS) (55%)$2.89***
Geron (NAS: GERN) (54%)$2.96***
Dendreon (NAS: DNDN) (71%)$12.56**
Cheniere Energy (NYS: LNG) (39%)$7.83**

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.

5 super falls -- 1 superball
What a week. As markets melted in the early August heat, more than 5,800 stocks declined in value. More than 2,300 of these lost 10% or more of their market cap ... and that's the good news.

The bad news is that the stocks named above each lost more than 20% of its value. So what went wrong?

Beginning at the bottom, Cheniere slumped all week long as investors feared the company would disappoint on earnings. Then, on Friday, Cheniere did just that -- reporting a $0.67 per-share loss, and sending the stock into a final 5% death spiral before trading mercifully ended.

Dendreon, as you've probably heard by now, fared even worse. Management's having trouble getting people to ante up $93,000 for a course of treatment with Provenge and had to pull its revenue forecast as a result. Result: A jaw-dropping 65% plunge in stock price.

Geron? Ger-off. The stem cell pioneer reported a $0.17 loss last Thursday, and the stock's been sinking ever since.

And of course, I told you about investor worries at DryShips -- and why I share them -- last week. Nor am I alone. In fact, judging from the two- and three-star ratings CAPS investors assign these stocks, a lot of people are worried about a lot of these companies. One stock that doesn't worry them a whit, however, is Western Refining. In fact, post-sell-off, they're more eager to own it than ever before. Let's find out why, as we examine ...

The bull case for Western Refining
CAPS All-Star goldminingXpert calls Western "best of breed" in the oil refining industry.

HardnoseDotCom likes the "low PEG" ratio on the stock. (About 0.1 based on forward earnings estimates, according to Yahoo! Finance!)

And from a business standpoint, CAPS member JPAKolypse86 argues that "the problem with gas prices isn't the oil supply. Its the refining capacity. Environmental regulations make building additional refineries almost unprofitable." That basically limits Western's competition to existing rivals such as ConocoPhillips (NYS: COP) and Valero (NYS: VLO) , and helps all players to preserve their profit margins.

At least, it should do that in theory. In fact, though, and in explanation for last week's sell-off, Western actually turned in profits ($0.94 per share) far below what Wall Street thought it should produce ($1.16 per share) in its second quarter. But is this shortfall really reason to sell the shares?

Western Refining: Buy the numbers
I don't think so, and I'll tell you why not. Yes, on a GAAP basis, Western may have failed to live up to projections for wild profits last quarter. But to my Foolish eye, Western Refining pumped out plenty of profit where it counts -- on the cash flow statement.

Consider: Over the last 12 months, Western's reported "net income" comes to just under $112 million. But over the same period, Western generated far more free cash flow than it was allowed to report as "profits" under GAAP -- about $358 million, by my calculations. At today's market cap, that works out to a price-to-free cash flow ratio of just 3.8 on the stock. Factor in the company's debt load, and Western's enterprise value-to-free cash flow is still a very reasonable 6.7.

Time to chime in
Whichever figure you want to use, it seems clear that Western Refining is a whole lot cheaper than the "51 P/E" shown on Yahoo! Finance today would suggest. My guess: Once investors catch on to that fact, Western Refining could catch a major bounce.

Of course, that's just my opinion. What's yours? Tell us about it on Motley Fool CAPS.

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. 449 out of more than 170,000 members. The Motley Fool owns shares of Western Refining.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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