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 members of Motley Fool CAPS, 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:

Companies

 

How Far From 52-Week high?

Recent Price

CAPS Rating
(out of 5)

E*TRADE Financial (NAS: ETFC) (49%)$8.46****
E-Commerce China Dangdang (NYS: DANG) (76%)$5.45**
Renren (NYS: RENN) (67%)$4.93**
Molycorp (NYS: MCP) (70%)$19.64**
Sirius XM Radio (NAS: SIRI) (23%)$1.88**

Companies are selected by screening on finviz.com for abrupt 10% or greater price drops last 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 was a miserable one to be invested in the market, as some 5,800 separate stocks lost value -- and that's the good news. The bad news is that well over 1,000 of these stocks (including all five named above) were literally decimated, losing 10% or more of their market caps. So what went wrong?

Beginning at the bottom, reports that CEO Mel Karmazin sold 11 million shares of Sirius XM did a number on the stock last week. Seeing as I'm on record saying the stock was overpriced, I can hardly fault him for taking some winnings... but the move seems to have Sirius shareholders feeling seriously spooked.

Almost as spooked as the folks at Molycorp. Worries that China's stranglehold on the rare-earth metals market is loosening have sent prices plummeting -- and with them much of the rationale for owning Molycorp, one of the few rare-earth miners outside the Middle Kingdom. The stock looks cheap at just 16 times GAAP earnings, but don't be fooled. So far, Molycorp hasn't generated a red cent's worth of actual free cash flow from this business.

And speaking of cash-burning enterprises: Renren and Dangdang. Both of these Chinese Internet plays are free-cash-flow negative at last report. They're also undoubtedly victims of last week's Facebook fiasco. Adding to the misery, Renren warned of week revenues in the second quarter, while Dangdang got crushed after confirming that it missed revenue targets in the first quarter.

But what about the top-ranked stock on this week's list? What about four-star E*TRADE? As it turns out, there's actually a pretty strong...

Bull case for E*TRADE
All-Star CAPS investor joryko likes E*TRADE's strategy of "refocusing their business back to being a strong discount broker. It has proven to be profitable in the past and has reaffirmed this fact in the few quarters as well."

CAPS member BrightEyed adds that "trading volumes have skyrocketed in conjunction with recent market volatility." And if there's one upside to last week's Facebook feeding frenzy, it's that this is a trend working in E*TRADE's favor.

Long story short, RScottK26 concludes that while E*TRADE still has "more debt than I would like to see ... as the markets recover, I think they will continue to improve (or get bought out.)"

I agree. E*TRADE blew right by analyst estimates last quarter, and appears to be on the right track today. As far as the buyout scenario goes, I don't usually like to rely on that option as a reason to buy a stock, but RScottK26 has a point.

At 14.4 times earnings and 1.7 times sales, E*TRADE sells for a hefty discount to rivals such as TD AMERITRADE (16 times earnings, 3.5 times sales) or Schwab (19.4 times earnings, 3.4 times sales). As such, an argument can in fact be made that a rival, or private equity, might find the stock an attractive candidate for acquisition.

Foolish takeaway
Individual investors who prefer to spread out their risk and diversify their holdings might prefer to invest in indexes, or their ETF analogs such as the "3 ETFs Set to Soar During the Recovery" that we recently profiled. (Report free for download -- just click here.) As for me, I think that E*TRADE's low valuation and long-term earnings growth rate (pegged at north of 22%) make the stock a good bargain. Investors hoping to beat the index returns by adding a few individual deep-value stocks to their portfolio should give this one a look.

That's why I've personally recommended E*TRADE stock in my CAPS account. That's why I stand by this recommendation today.

At the time this article was published Fool contributorRich Smithdoes not own shares of (or short) any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 306 out of more than 180,000 members. The Fool has adisclosure policy.Motley Fool newsletter serviceshave recommended buying shares of TD AMERITRADE and Charles Schwab.Motley Fool newsletter serviceshave recommended creating a bull put spread position in TD AMERITRADE. We 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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