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)

Riverbed Technology (NAS: RVBD) $41.83 $16.99 ****
Enerplus Corp. (NYS: ERF) $32.53 $16.10 ****
Acme Packet (NAS: APKT) $78.71 $24.41 ***
First Solar (NAS: FSLR) $142.22 $16.14 **
RadioShack (NYS: RSH) $16.36 $4.71 *

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 topsy-turvy week, markets finally gave up and ended down on Friday, the S&P 500 losing 1.2% when all was said and done. Blame JPMorgan and its $2 billion blunder if you like, but the stocks in the chart above certainly didn't help matters, as each fell to a 52-week low. What went wrong?

It wasn't always clear. RadioShack, for example, seems to be just slumping along in the wake of last month's earnings report that showed declining comps and weak smartphone sales at the cutting-edge-circa-1950 retailer. Likewise, Acme Packet had no particularly bad news to report. Ever since underwhelming earnings came out two weeks ago, the stock just seems to have lost its mojo.

Meanwhile, First Solar fell victim to a downgrade from analysts at Argus, and never really recovered. And Canadian oilman Enerplus went into negative territory after reporting basically nil increase in funds flow, and steeply lower cash flow in Friday's report.

But Riverbed? Honestly, that particular sell-off appears to have more to do with Cisco's earnings warning than with anything Riverbed itself did. Cisco CEO John Chambers' warning about a declining "trend in the enterprise IT spending" space reverberated far and wide throughout the tech industry, taking down Riverbed with it. But could the pessimism be overblown?

The bull case for Riverbed Technology
CAPS member RSue thinks so: "Network optimization is becoming increasingly important with exponentially growing traffic on wide-area web networks -- with respect to speed, efficiency and cost savings. Riverbed is a leader in the field and has a raving fan base."

The Fool's own TMFZahrim agrees: "There are so many megatrends driving demand for high-speed networking today that Riverbed really can't lose.

And CAPS member PETPOE thinks the stock is quite simply "oversold. patient investors should see decent returns from here. my guess is around 50% in 6-12month."

I agree. In fact, I think PETPOE's 50% profit estimate might even be conservative.

Valuation matters
On the surface, Riverbed still looks expensive. It's hard to say otherwise about a stock that sells for 50 times earnings. But dig a little deeper and what do we find?

Over the past 12 months, Riverbed generated $178 million in free cash flow -- roughly three times the amount of its net income as determined by GAAP. This copious cash generation has enabled Riverbed to build up a bank account flush with nearly half-a-billion dollars cash. And when you back that out of the company's market cap, what you're left with is an enterprise value of just $2.2 billion.

Foolish takeaway
By my calculations, Riverbed's $178 million in annual free cash flow and 22% projected long-term growth rate work out to a back-of-the-envelope value of about $3.8 billion, suggesting the stock could rise upward of 70% before reaching full valuation.

Will it get there? I honestly don't know. The truth is that there are a lot of great bargains out there in tech these days. But the margin of safety on this stock is so big that I'm willing to publicly recommend Riverbed to CAPS members. I think the stock's a buy, and I'll put my reputation on the line to say it.

Think I'm wrong? Follow along and find out.

At the time this article was published 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. 342 out of more than 180,000 members. The Fool has a disclosure policy.The Motley Fool owns shares of Cisco Systems, RadioShack, and Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Riverbed Technology, Acme Packet, and First Solar. Motley Fool newsletter services have recommended creating a stock position in Riverbed Technology.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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