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-member Motley Fool CAPS community, we'll see whether any of them have the potential to bounce back.

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:

 

CAPS Rating
(out of 5)

Dolby Labs (NYS: DLB) (58%)$28.78*****
Westport Innovations (NAS: WPRT) (19%)$27.80*****
SandRidge Energy (NYS: SD) (46%)$7.27*****
Micron Technology (NYS: MU) (55%)$5.43****
Taseko Mines (NYS: TGB) (47%)$3.41****

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
Last week wasn't a great one for stocks. Although the Dow Jones Industrial Average (INDEX: ^DJI) managed to end "up" for the week, more stocks lost money than gained. Up above, you see five of the week's worst performers -- five stocks that, even though they're worth less today than they were seven days ago, nonetheless retain strong support among CAPS investors. These include:

  • Taseko Mines, which just reported a 43-fold increase in quarterly earnings...
  • Micron Tech, which has been lagging rival SanDisk of late, but which, according to CNBC, is starting to see strong support in the options trading market...
  • SandRidge Energy, coming off a bad week in which it cut guidance for future oil production...
  • And Westport Innovations, a play on natural gas-fueled automobiles that got sent tumbling last week for no apparent reason.

Now, everybody loves a bargain, and so the cheaper these stocks get, the more investors seem to like them. Just ... not I. Fact is, of all the stocks discussed so far, I wouldn't put new money into any of them, not even Micron, which I already own.

Whatever their income statements may tell you, their cash flow statements confirm that none of these companies is currently generating positive free cash flow from its business. In fact, only one stock on the list does make that cut: audio tech specialist Dolby Laboratories. That's why today, we'll be focusing our attention on Dolby.

The bull case for Dolby Labs
Dolby shares have lost 58% of their value over the past 52 weeks, largely because investors are afraid the company's software won't be included in the upcoming Microsoft (NAS: MSFT) Windows 8 OS. But CAPS All-Star brownboddington puts a green thumbs-up on the stock:

DLB "the stock" is being driven by short-term concerns but DLB "the company" still has a bright future ahead of it. ... In 3 years no one will remember Microsoft 8. Buy and wait for everyone to come to their senses.

As CAPS member scootertrader points out, Dolby has long been "the gold standard for the industry."

Based on its long-term performance, ace CAPS member ValuePicksOnly argues the stock has "Solid fundamentals and a fair value of around $70. Even if the loss of support from Microsoft would cut the value of the company by 25%, resulting in a fair value of $52.5, there is still an 75% upside!!"

Opinions differ
Of course, not everyone thinks this way. Over on Wall Street, Piper Jaffray just downgraded Dolby to "neutral." It did this not solely because of Windows 8, but also because slow consumer electronics and personal computer shipments, combined with declining sales of Blu-ray disk players, flooding in Thailand, and other current events, have the analyst fearing "near-term headwinds" will prevent the stock from rising.

But here's the thing: Everyone knows shoppers are stretched this year, and less inclined to spend on electronics products. We know iPads and similar tablets are stealing sales from the traditional PC market, that streaming is starting to replace DVD watching, and on and on. The risks here are well-known and already reflected in Dolby's stock price.

Indeed, even Piper admits that at current levels, there's little downside risk left in Dolby stock, which costs a bare 11 times earnings, and only 10 times free cash flow. Meanwhile, the same analysts who've pointed out the near-term risks at Dolby still believe that over the long term, this company can grow its profits at better than 16% per year. To me, paying 10 or 11 times profits for a 16% grower sounds awfully cheap. Cheap enough to turn this stock into a superball at the first sign of good news?

Yes, I think it just might be.

Is Rich right about Dolby? The company announces fiscal 2011 earnings Thursday evening.Add Dolby Labs to your Fool watchlistright now, and make sure that when the news breaks, you're first in line to hear about it.

At the time this article was published Fool contributorRich Smithowns shares of Dolby (which he likes) and Micron (not so much). You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 311 out of more than 180,000 members. The Fool has adisclosure policy.The Motley Fool owns shares of Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Dolby Laboratories, and Westport Innovations.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Microsoft.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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

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