Get Ready for the Bounce

"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:

CAPS Rating(out of 5)

Elbit Systems (NAS: ESLT)








Active Network (NAS: ACTV)




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

With the S&P 500 basically coasting for most of last week, down a bare 0.5% in five days, there wasn't a lot of action on the "unbelievable bargains" front. Still, a few possibilities have presented themselves as Mr. Market delivered up new 52-week low prices on two stocks that investors like, and one more that they don't. Let's take them one at a time, and start with the more obvious choices.

Elbit Systems
If you've never heard of Elbit, don't be embarrassed. Not many U.S. investors have heard of it. Perhaps because Elbit runs its shop out of Haifa, Israel.

Broadly speaking, Elbit is a maker of "high-performance defense electronic and electro-optic systems for customers throughout the world" -- a defense contractor, in other words. (And we know how popular those kinds of stocks have been lately.) Elbit, however, is probably best known for its role in one of the segments of defense spending that's actually growing: unmanned aerial vehicles. Elbit makes the medium-sized Hermes UAV, and has done so well with this that a few years ago, defense contracting heavyweight General Dynamics (NYS: GD) chose it as a partner to jointly build UAVs for the military.

Elbit could do pretty well for investors, too. Priced at just 14 times earnings, growing at 11%, and paying a 2.7% annual dividend, the stock looks at worst fairly priced. When you consider further that Elbit generates annual free cash flow 43% greater than its reported GAAP income, the stock could be even cheaper than it looks. CAPS member dgoldmeier calls Elbit "a solid company with a nice div. in a world which will continue to grow demand for their product lines." I agree.

Vale SA
Last week was a rocky one for anyone involved in iron mining. Australia's BHP Billiton (NYS: BHP) announced it's shelving plans to expand iron mining in the country due to the global "boom" in commodities having finally ended. Suffice it to say that if BHP is right, this won't be good news for Vale, which is one of BHP's primary competitors on the global market.

Regardless, with its stock priced at just 6.3 times earnings, Vale's 6.1% annual dividend alone may justify the stock price, and that's if Vale never grows its earnings again... ever. My main reservation here is that most analysts seem to think Vale not only won't grow, but will see its profits decline markedly over the next five years. Long story short, of the two four-star CAPS stocks on today's list, I think Elbit is the safer bet.

But what about the one-star stock?

Active Network
At first glance, I admit there doesn't seem to be much to like about this stock. Active, which provides cloud-computing "applications services" to businesses, missed earnings rather badly earlier this month. Free cash flow, too, suffered a marked slowdown.

Even so, I think investors who are writing off Active as a "one-star stock" may be missing the bigger picture. It did lose money last quarter, but revenues were up nicely, and Active's free cash flow came in at a robust $31 million -- enough to give the stock a price-to-free cash flow ratio of just 20.

In short, if Active can bounce back from last quarter's earnings slump, and deliver on the 32% long-term growth rate that Wall Street has it pegged for, 20 times free cash isn't at all a bad price to pay. (Active may not be our absolute favorite tech stock at the Fool; to find out who is, click here to get our free report.)

The article Get Ready for the Bounce originally appeared on

Fool contributorRich Smithdoes not own shares of, nor does he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 263 out of more than 180,000 members. The Fool has adisclosure policy.Motley Fool newsletter serviceshave recommended buying shares of Active Network. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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