Get Ready for the Bounce

"Don't catch a falling knife," as the old saw commands. (Pardon my mixed-cutlery metaphor.) The idea of buying a former superstar stock at a discount price certainly is attractive, but you've got to make sure you catch the haft -- not the blade. That's where Motley Fool CAPS comes in.

Today, once again we stand beneath Mr. Market's silverware drawer, measuring which knives have fallen the farthest. Then we'll call on CAPS to ask which of these stocks -- if any -- Foolish investors believe are ready for a rebound. Let's meet today's list of contenders, drawn from the latest "52-Week Lows" list at Nasdaq.com:

Companies are selected from the "NASDAQ 52-Week Low" list published on Nasdaq.com on the Saturday following close of trading last week. 52-week high and recent prices provided by Yahoo! Finance as of same date. CAPS ratings from Motley Fool CAPS as of May 16.

Knives and knaves
If there's one good thing about a broad-based market sell-off, it's that you find a lot of terrific companies getting the baby 'n' bathwater treatment. Tossed out on their rosy little bums as if they were bums of another sort. You know -- just know -- that some of these babies are gonna bounce right back after the suds subside.

This week, we're seeing the supposedly successfully navigated financial services crisis continuing to take a toll on the industry. But while four minibankers' shares are enduring the fate of high-profile brethren like Citigroup (NYSE: C) and Bank of America (NYSE: BAC), plumbing the markets' depths, one company that you'd expect to follow along remains high in the regards of CAPS investors. FirstService may broker mortgages and manage residential properties, but investors expect it to rebound more quickly than other companies in the industry. Let's find out why.

The bull case for FirstService
With just four exceptions, the 42 CAPS players who've taken a look at FirstService like what they see -- outperform ratings on this stock are nearly unanimous. Ten of our 11 All-Star investors who've looked at it like it, and all but the most recent (ahem) of the eight pitches on the stock are favorable. That said, the most recent pitches leave a lot to be desired in the specificity department. To find the bull thesis on this one, we have to dig back more than a year into our archives, when:

• kikodog argued that FirstService "[p]rovides essential services to business. Growth potential is global. Solid management with proven results."
• questfordollars praised FirstService's "[s]olid management and great cash flow."
• And Tex05 called the company a "[s]trong [performrt] over the last 10 years, agressively expanding their market within the Real Estate realm, managing properties."

Pretty bullish sentiment, huh? But I'm afraid I have to differ with our pitchers this week. The way I see it, FirstService has a long row to hoe before it has any chance of bouncing back. The numbers just don't support a bullish view.

I mean, sure, at first glance, the company's price-to-earnings ratio of 14 doesn't look bad compared with the 12% growth projections that Wall Street has for this stock. But that's not the most important metric. Price-to-tangible book value is much more important when looking at banks, and this company currently has a negative tangible book value.

Further, there's a good-sized gap between FirstService's GAAP profits and what it produces in actual free cash flow. FirstService reported nearly $27 million in net earnings last year, but its free cash flow came to just $20.4 million.

Call me a pessimist, but the way I see it, a bank performing this way doesn't deserve to bounce. I wouldn't be surprised to see it fall farther.

Copyright © 2008 Universal Press Syndicate.