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)

Pan American Silver (NAS: PAAS) $35.67$18.47****
Kinross Gold (NYS: KGC) $18.25$8.85****
Newmont Mining (NYS: NEM) $72.42$46.37***
Barrick Gold (NYS: ABX) $55.95$39.61***
Electronic Arts (NAS: EA) $26.13$14.88***

Source: 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 week of pops and drops, the S&P 500 ended last week modestly higher. While this week is looking like it wants to give us another roller-coaster ride, the good news is that overall, the stock market remains firmly "in the green" for the year.

Considering all the troubles going on in Europe these days, that's pretty surprising. But do you know what's even more surprising? The fact that so many companies, which you'd think should be leveraged to global economic uncertainty, are doing so poorly of late. Companies whose stock in trade is precious metals, the supposed antidote to worries over the integrity of fiat currencies in Europe. Companies such as Kinross Gold, Pan American Silver, Barrick Gold, and Newmont Mining (to name a few). Yet all these companies (and Electronic Arts besides) hit 52-week lows last week. Why?

Let's first deal with the thing that is not like the others. With investors all a-twitter over social gaming, and Zynga in particular, "traditional" gaming companies like EA are getting short shrift. For no reason in particular, the stock sunk to new lows last week. Sure, the rumor mill says EA may (or may not) be planning layoffs. But even if true, this would suggest lower costs and higher profits going forward. With EA already at just 13 times forward earnings, the stock could be even cheaper than it looks.

As for the precious metals stocks, fellow Fool Sean Williams took a look at the plunge in Barrick Gold's share price earlier this week, so let's start with that one. As Sean points out, it's getting harder and harder to find a mother lode these days. As a result, the big story in mining is rising cost of production. Not just at Barrick -- Newmont's profit margins have been slipping as well, and earlier this year, high cost of production forced Kinross Gold to scale back production at one of its mines. Worries that price appreciation may not be able to keep up with the high cost of digging up shiny rocks are keeping the share price of gold and silver stocks depressed.

And in at least one case, perhaps unreasonably so...

The bull case for Pan American Silver
Scanning this week's list of underperformers, silver miner Pan American looks particularly attractive. At a price just 5.6 times earnings, it's cheaper than Newmont, Barrick, or Kinross (in that order). And I'm not the only investor who thinks this stock may have potential.

On CAPS, investor Reesetricted points out that "Pan American has the highest forward earning yield in the industry combined with the lowest EV/EBITDA and lowest P/E. That is like planetary alignment!!!

CAPS member jabafuller likes the firm's "strong cash position."

And the Fool's own TMFGalagan -- a CAPS All-Star, no less -- goes so far as to muse on whether Pan American Silver just might be "the perfect stock."

Me, I wouldn't go quite that far. But I will say that Pan American looks good. The 5.6 times earnings really isn't a lot to pay for a company that most analysts agree should be able to grow its earnings at 11% per year over the next five years. And while Pan American doesn't back up all that claimed income with actual free cash, the $236 million in free cash flow that it does produce is more than the other four-star-rated stock on our list (Kinross) can claim. It's also good enough to give Pan American a low 8.1 times FCF valuation -- plenty low for the growth rate.

Foolish takeaway
With ample cash reserves to its credit, and more cash flowing into its coffers every day, Pan American Silver looks deeply undervalued relative to its prospects. I like it enough that I'm going to go ahead and officially recommend this stock with an "outperform" CAPScall on Motley Fool CAPS.

Will it work out? Follow along and see.

And if you're looking for more ways to profit from the high price of precious metals, read the Fool's new report, and we'll tell you all aboutThe Tiny Gold Stock Digging Up Massive Profits. This report is free for download today, but won't be for long -- so make sure toclick quick.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Pan American Silver, but Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 352 out of more than 180,000 members. The Fool has a disclosure policy.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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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