The 10 Worst Recession Stocks

By
Ilan Moscovitz


February 19, 2009
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Comments (5)

Last week, I published my updated list of the 10 best-performing stocks since the last recession, to help you identify the lessons that will help us this time around.

The study yielded some fascinating insights, not the least of which
was that investors who keep their wits about them during times of maximum pessimism can truly make money on incredible stocks.

When my colleague John Reeves and I first began this study a year
ago, we got some great email feedback from our Foolish readers, some of
whom suggested that a piece on the 10 worst stocks since the last recession would also be helpful. And we knew taking that route would be fun.

To keep things interesting, I excluded bankruptcies and delisted stocks. Without further ado:

Data from Capital IQ, a division of
Standard & Poor's. Includes domestic and Canadian stocks traded
over major exchanges and capitalized above $200 million as of Dec. 31,
2000. Note: Past performance does not necessarily indicate future
performance.
*For the year 2000.
**Excludes the possible outlier, Cell Therapeutics.

Before I can share with you what accounts for these ugly returns -- and what you should avoid today -- a word about what wasn't responsible for their underperformance.

Stock price histories

While some of the
worst recession stocks declined substantially during the actual
recession (March to November 2001), others appreciated. This shows that
beaten-down stocks can be great opportunities, but only if the company itself isn't doomed.

Some of the most startling cases include Qwest (NYSE:  Q) and Research In Motion (Nasdaq: RIMM), both of which had fallen around by 60% during the recession but have since dropped by 90% and risen by 150%, respectively.

That's why, back in September, I warned investors not to touch value traps Citigroup (NYSE: C),
Lehman, and Wachovia. Those stocks appeared tempting to many investors,
even though their businesses had deteriorated alongside their share
prices.

Simply put, past price histories cannot tell you whether a company is undervalued or overvalued today.

With that out of the way, here are four things you should avoid:

1. No profits

What counts as "very
profitable" varies by industry, but generally, you want to see
companies with a return on equity of at least 10%. Every one of the 10
worst recession stocks lost money in 2000.

2. Too much debt

Several of the worst
stocks had onerous debt loads. Too much debt limits a company's ability
to take risks and increases the chances of a blowup, should the
business hit a rough patch. The worst stocks didn't have a buffer
between their operating incomes and interest payments and, in most
cases, actually had negative operating income. (In fact,
seven of the 10 worst recession stocks had no operating earnings with
which to pay the interest on their debt!)

3. Overpaid CEOs

When I showed this list
of worst stocks to Fool co-founder Tom Gardner, he immediately brought
up the issue of executive compensation. At the Fool, we've always noted
that excessive compensation can indicate that the folks in management
lack internal motivation and may induce them to maximize short-term
performance at the expense of their company's long-term health.

To take a recent example, Lehman Brothers CEO Dick Fuld -- whose
salary, bonuses, and options from 2000 to 2007 came out to more than
$15,000 per hour (even assuming 80-hour work weeks!) -- oversaw the destruction of a company that predated the Civil War. On the other hand, General Electric (NYSE: GE)
is known for its generous payouts, but compensation is wisely tied to
long-term operating metrics that managers can control, rather than
merely to daily share-price fluctuations.

more...http://www.fool.com/investing/general/2009/02/19/the-10-worst-recession-stocks.aspx?terms=10+worst&vstest=search_042607_linkdefault