5 down stocks: Poised for a rebound?

By The Motley Fool

Individual stocks can surge 10%, 25% or even higher in a short period of time. And they can fall just as far, just as fast. For example, Sun Microsystems (JAVA, news, msgs) jolted investors when it posted a surprising fiscal-third-quarter loss last month, and its shares tumbled nearly 23% in a single day as payback.

Big drops in share price can sometimes signal material defects or new risks. But at other times, they're simply pullbacks after a long run-up.

Fortunately, we have MSN CAPS, a resource to help you understand the larger picture behind big price drops.

• MSN CAPS: The wisdom of the investing crowd

CAPS incorporates the knowledge, information and skills of more than 105,000 participants. The opinions of the best-performing investors have more weight in shaping the ratings attached to each company. This allows investors to employ collective estimates.

We'll use CAPS' stock screening tool to quickly zero in on companies whose share prices have plummeted 20% or more over the past month, have a market value of at least $100 million and a beta of 3 or less. (Beta is a way of measuring risk in a portfolio. It describes how the expected return of a stock is correlated to the return of the market as a whole.)

Our screen is designed to keep us out of the mud-filled world of gyrating penny stocks.

Here's a sample of stocks our CAPS screen returned:

Going down

Company	Sector	1-month decline	Market cap	CAPS rating (out of 5)
Melco PBL Entertainment	Resorts and casinos	30%	$14.4 billion	****
Wachovia	Banking	29%	$41.6 billion	**
Delta Air Lines	Airlines	27%	$1.6 billion	*
US Airways Group	Airlines	51%	$320 million	*
MBIA	Surety and title insurance	48%	$1.3 billion	*

Spreading the risk -- to shareholders

Let's delve into recent circumstances and find out why some of these stocks have been beaten so badly.

There's just no love for the major banks that milked the subprime gravy train past its expiration date -- make that "foreclosure date" -- then left investors holding the bag. One of those banks made our list. Wachovia (WB, news, msgs) shares continue to spin downward as its balance sheet bleeds.

As Wachovia aims to raise another $7 billion in capital after its ill-timed foray into the California real-estate market with its purchase of Golden West Financial two years ago, it has also cut its dividend. But Wachovia's problems come from more than bad mortgages -- at the end of the first quarter, it had $23.9 billion in outstanding construction loans, with almost half of those exposed to the troubled housing sector.

And while the various initiatives established by Ken Thompson seem the bank's only recourse to avoid bankruptcy, they nonetheless earned Thompson membership in the "I used to be a big-bank CEO" club. He's one of the latest executive casualties in the financial industry, joining top executives from Merrill Lynch (MER, news, msgs), Citigroup (C, news, msgs) and Washington Mutual (WM, news, msgs).

At CAPS, a herd of bulls still sees the potential for a turnaround at Wachovia, with 1,174 of the 1,573 investors who've rated the company believing it'll beat the market. On the other hand, a higher proportion of CAPS All-Stars remain bearish on the bank.

• MSN Stock Challenge: Win cash and other prizes

Surprisingly, there may be a sector more loathed than banking right now: airlines. After months of exploring a consolidation with US Airways Group (LCC, news, msgs), UAL's (UAUA, news, msgs) United Airlines decided to call off the process for now. But with oil north of $130 a barrel, airlines will be squeezed to raise prices or implement major cutbacks and layoffs to survive.

While US Airways' pilots' union strongly opposed the merger and was happy to see the UAL deal scuttled, the stock market isn’t so thrilled. Many investors see no way to avoid further pain, beyond raising ticket prices or nationalizing the airlines.

As such, US Airways is only one of many one-star airline stocks in CAPS, with more than 80% of All-Star players who've rated the company expecting it to underperform the market.

Ultimately, whether you believe a fall in any stock is warranted, your own research is more important than collective opinions. CAPS can help you quickly focus your due diligence, and even point out potential pitfalls you may not have seen.

Add your take on these or any of the 5,700 stocks that participants have covered in CAPS. It's totally free to be a part of the community, and the payback can be valuable.

This article was reported and written by Dave Mock for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.

Editor's note: MSN CAPS is an investor intelligence service hosted by The Motley Fool. Companies are rated by players to outperform or underperform the market and are subsequently ranked from one star (the lowest) to five stars. Between Jan. 3, 2007, and May 12, 2008, five-star companies outperformed the SPDR Trust, an exchange-traded fund that tracks the S&P 500, by an average of 9 points, annualized, while one-star companies underperformed by an average of 15.6 points, annualized.