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.

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)

Digital River (NAS: DRIV) $39.85$15.27****
Intrepid Potash (NYS: IPI) $40.22$21.80****
Spansion (NAS: CODE) $21.60$8.54****
Broadcom (NAS: BRCM) $47.39$30.29***
U.S. Natural Gas (NYS: UNG) $12.96$7.35**

Companies selected from the list of stocks hitting new intraday 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
After a rough week for investors, markets enjoyed a big bounce Friday -- a bounce thanks to which many stocks managed to (just barely) avoid ending the week at new 52-week lows. But note that I said "many." Not all. Up above, you see five stocks that managed to end the week on a low note despite the last-minute reprieve. What went wrong? The answers range from painfully obvious, to murkily unclear.

Let's start with the easy ones: For years, since the oil and gas industry discovered new ways to frack up the environment, natural gas prices have been tumbling, and taking shares of the U.S. Natural Gas ETF along with them. The more things don't change, the more they stay the same.

Broadcom and Spansion? No mystery there, either. Texas Instruments dropped a bombshell on semiconductor investors of all sorts when it issued a weak Q4 forecast Thursday. Personally, I think investors overreacted, but that doesn't change the fact that these two industry participants became collateral damage to TI's bad news.

Now here's where it gets harder: If Broadcom and Spansion got hurt by somebody else's weak performance, you might have expected Intrepid Potash to be helped by a bullish forecast at fellow ag-industry player Monsanto (NYS: MON) , which upped guidance for its own fiscal Q1. Instead, it seems Intrepid got pulled down by the weight of a downgrade that JPMorgan leveled at fertilizer maker Mosaic (NYS: MOS) . Sometimes, you just can't win.

And speaking of stocks that just can't win, have you taken a look at Digital River lately? It recently inked a big deal with Panasonic to run e-commerce for its Viera Connect TV service in Europe, and another contract to launch a chain of Cisco Linksys-branded online stores in Europe. Regardless of the good news, and with no bad news in sight, DR stock has continued to slide to new lows. Which brings us to...

The bull case for Digital River
All-Star CAPS member TSIF starts us off with some background on Digital River and why the stock is in such a funk today. Revisiting the last quarterly report, he notes: "Profits were not far out of line, but Digital River did guide down, which is a huge no-no on a high flyer." That said, thanks to that reduced guidance, and the sell-off that ensued, we're now looking at a stock trading "at a near 52 week low, 2X cash to debt ($17 per share in cash), and decent cash flow."

CAPS member gooski1 likes the stock at this level, calling it a "beaten down tech stock," praising its "good cash position relative to debt," and musing that DR could become a "potential buyout target."

I agree. With Digital River's $310 million in net cash to work with, a buyout of Digital River would basically finance itself. Plus, if we net out the company's cash, and focus on ex-cash market cap (enterprise value), we're basically being asked to pay around $255 million for a company that:

  • collects $384 million in annual revenue (a 0.66 P/S ratio),
  • $18 million in profit (a 14 P/E),
  • and, most crucially, a whopping $40 million in free cash flow -- which works out to an ultralow 6.4 ratio on enterprise value-to-free cash flow.

Foolish takeaway
Fools, these kinds of numbers suggest that Digital River would be attractive if it were only growing in, say, the high single digits. But in fact, most analysts on Wall Street expect to see DR get through its current rough patch and go on to post five-year average growth of 16% annually. Charging a mere 6.4 times FCF for this kind of growth seems awfully cheap.

But is it cheap enough that I'm willing to stake my reputation on Digital River outperforming the market from here on out? Actually, yes it is. Right now, I'm heading over to Motley Fool CAPS to rate this stock an "outperform." Feel free to follow along, and jeer loudly if I turn out to be wrong.

And if you're looking for more great tech picks, take a look at the Fool's new, free report:The Only Stock You Need To Profit From the NEW Technology Revolution.

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. 327 out of more than 180,000 members.The Fool has adisclosure policy.The Motley Fool owns shares of Cisco Systems and Texas Instruments and has created a bull call spread position on Cisco Systems.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems and creating a synthetic long position in Monsanto.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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