Get Ready for the Bounce

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"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.

It's been a while, but thanks to last week's sell-off, we once again have a chance to stand beneath Mr. Market's silverware drawer in hopes of snagging a bargain. Let's meet today's contenders:

Company

 

52-Week High

Recent Price

CAPS Rating

(out of 5)

Berkshire Hathaway (NYS: BRK.A) $131,463.00$107,300.00*****
Petroleo Brasileiro (NYS: PBR) $42.75$29.07*****
Molson Coors (NYS: TAP) $51.11$42.53*****
Teva Pharmaceutical (NAS: TEVA) $57.08$40.72*****
Corning (NYS: GLW) $23.43$14.32*****

Companies selected from the list of stocks hitting new 52 week lows as reported on finviz.com. Recent price and 52-week high provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

The week in weak stocks
Last week was a bad week for stocks. (I may be understating the case.) By my count, some 5,800 stocks came out of it priced lower than when they went in. And indeed, up above you see five companies whose shares are now trading at their lowest points in a year. But why are they so cheap? That's the real question.

Beginning at the bottom, Corning seems to be still suffering the aftereffects of the previous week's earnings report. In contrast, Teva took a tumble Monday for more recent news. Clinical trial results showed laquinimod, its new multiple sclerosis drug, performed little better than a sugar pill. (Although this was good news for Biogen Idec (NAS: BIIB) , which makes an older, competing MS drug that was found to work better.) One day later, Teva's misfortune was compounded when Cephalon -- which Teva is buying -- announced weaker-than-expected profit.

Molson also missed on Tuesday. Weak sales, worsened by higher costs for key ingredients and fuel to move its trucks, hurt profits at the brewmeister. And speaking of stocks screaming "PBR me ASAP!" Petroleo Brasileiro fell victim to a massive sell-off of Brazilian stocks Thursday. According to Forbes, the country's stock market was the very worst performer out of 20 large equity markets surveyed.

Of course, the most striking thing about all these stocks selling off is how utterly unfazed investors seem to be about them. Look up and down the list -- each and every stock named is rated five stars on CAPS, despite -- or perhaps because of? -- the fact that they now cost less than at any time in the past year.

Stock prices gone wild
If that surprises you, well, maybe it shouldn't. As I argued last week, one of the great things about a sell-off such as we've recently witnessed, is how it makes superb investments significantly cheaper to own. Wall Street knows this. In fact, according to public trading information, it's been taking advantage of lower prices to load up on shares of one of these companies in particular: Berkshire Hathaway (NYS: BRK.B) .

The bull case for Berkshire Hathaway
That's right. Berkshire. "Warren Buffett's company." CAPS member forthewin11 believes Berkshire is a "great holding" at today's prices and possesses "even better leadership" with Buffett at the helm.

CAPS member Diws argues that, when you consider Berkshire's market cap as a multiple of its book value, the stock is "trading at one of lowest valuations in decades."

And really, for no good reason. As CAPS member beadnell points out, the many subsidiaries that make up this company's "businesses are profitable and sound."

And how. As luck would have it, no sooner had Berkshire fallen to its lowest valuation "in decades," than the company came out with its Q2 earnings report. "How did Berkshire do," you ask? Oh, not too badly. Its profits were only up ... 74%!

As you might expect in "the Year of the Tornado," Berkshire's insurance businesses took a bit of a hit. But the company collected repayment of its 2008 investment in Goldman Sachs (NYS: GS) and made mongo profit from its recently purchased Burlington Northern railroad, while several of its manufacturing businesses also improved. When all was said and done, Berkshire came out of the second quarter with 3.4% greater book value than it possessed a year earlier, achieved 58% better first half free cash flow ($6.5 billion), and reported a 74% higher net profit.

Buy it like Buffett?
That first number may be the most important of all. While I doubt there was much cheering at Berkshire HQ over the 3.4% increase in book value, it did at least increase. And Buffett himself urges investors to focus on his company's book value as one of the better metrics for the company's worth as a whole. By that measure, today's share price has Berkshire trading at less than 1.1 times book -- whereas the S&P 500 index as a whole costs nearly twice as much: 2.0.

In uncertain times like these, there's a lot to be said for investing with Warren Buffett as your wingman. And with its price-to-book value hovering at a 50% discount to the S&P's, there's a lot to like about Berkshire Hathaway stock as well.

Do you think the stock's a buy? Tell us why.

At the time this article was published Fool contributorRich Smithdoes not own shares of, nor is he short, 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 180,000 members.The Motley Fool owns shares of Teva Pharmaceutical Industries, Berkshire Hathaway, Molson Coors Brewing, and Petroleo Brasileiro.Motley Fool newsletter serviceshave recommended buying shares of Berkshire Hathaway, Petroleo Brasileiro, Teva Pharmaceutical Industries, and Molson Coors Brewing. 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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