Drop-Dead Gorgeous Stocks

So goes the thesis of my weekly Fool.com column "Get Ready for the Bounce." Therein, I run the 52-week-lows list compiled by Nasdaq.com through the "wisdom of crowds" meter that we call Motley Fool CAPS.
And out the other end comes a list of stocks that have fallen so far
that Foolish investors figure they're just bound to bounce back soon.

But is there a way to cash in on fallen angels who've plummeted even
further? Perhaps. If a stock that's fallen for one year straight has
headroom, then maybe a stock that's fallen even farther, and longer,
has room to soar back even higher -- in which case, an apparently
left-for-dead stock could offer us a drop-dead gorgeous entry price.
We're going to test that thesis today, starting with four stocks that
just hit their 5-year lows:

Companies are selected from the "New 5-Year Lows" list published on MSN Money on Friday. CAPS ratings from Motley Fool CAPS.

Left for dead? Or drop-dead gorgeous?

Each
of the stocks listed above has shed between 39% and 79% of its value
over the past year alone, and currently sits at or near its five-year
low. Wall Street has left 'em for dead, but Main Street investors
aren't so sure.

In fact, we think two of these firms may have fallen too far --
giving us two fine opportunities to profit from a rebound. Which one
looks like the better deal? Well, more Fools are recommending Integral
Systems than Eagle Rock Energy -- so let's take a gander at...

The bull case for Integral Systems

A
producer of satellite ground systems, Integral just may be the biggest
aerospace company you've never heard of. The company does work for most
of the majors -- Boeing (NYSE: BA) and Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), EADS, and Lockheed Martin (NYSE: LMT).
Tiny in size, the firm's $165 million in annual revenue dwarfs its own
market cap, which barely peeks above the $100 million horizon of
Microcap Land -- but that's big enough to get it noticed on CAPS, where
some of our brightest minds think this stock is a star.

• CAPS All-Star TheBarnacle believes the stock has an: "Intrinsic value of 16.08 with great debt sheet," while All-Star RedScourge pronounces himself: "a big fan of satellite systems."
• And tenmiles, who boasts a perfect 100 CAPS rating, applauded the company last year for being "[d]ebt free, trading around 13x reduced forward guidance."

Of course, no one but the shorts
was applauding last week, when Integral issued an earnings warning that
cut this year's earnings expectations in half. Although management left
revenue guidance more or less unscathed, it blamed "recent schedule
delays on several large government contracts, the loss or cancellation
of three government programs within the past two weeks, and continued
weakness in the aerospace market." It expects this year's likely
earnings to be just $0.45 per share (from previous $1.01 guidance).

So is all hope lost? I mean, "delays" are all well and good. If
accurately described, such revenue will eventually come home to mama.
But three canceled projects in two weeks sounds just awful -- and the news sparked a 20% sell-off in the stock on Thursday.

Still, now that the damage is done, we're looking at a stock priced
at less than 15 times the now-reduced earnings guidance. A company that
has generated free cash flow in five of the last six years. A stock
that may live up to Wall Street expectations of 20% annualized
five-year growth, which would seem to suggest a bargain price. (Or not
-- after all, there's only one analyst covering Integral, so we're
stretching the definition of "consensus estimates" pretty far here.)

Time to chime in
Personally, I'm not as
convinced as some of my CAPS peers appear to be about Integral's worth.
While the company has a solid balance sheet -- "debt free" as tenmiles
points out -- it's not generating new cash flow at quite the level I'd
like to see, relative to reported profit. To me, there are better
prospects out there than Integral. I'd suggest we let this one drop
dead, and stay dead.

But hey -- that's just my opinion. What's yours?

Copyright © 2009 Universal Press Syndicate.