Wednesday's Worst Stocks in the World

Bad days. We all have them; some of us deserve them.

Here are five stocks whose naughty ways drew investors' scorn on Wednesday:

Company

Currently Fetching

CAPS Rating

(5 max)

%

Change

52-Week

Range

Vonage (NYSE:VG)

$1.93

*

(11.87%)

$0.89 to $7.89

Downey Financial (NYSE:DSL)

$53.12

*

(10.53%)

$43.55 to $75.29

Pozen (NASDAQ:POZN)

$9.72

**

(10.41%)

$8.29 to $19.75

Synta Pharmaceuticals   (NASDAQ:SNTA)

$9.32

***

(9.07%)

$4.93 to $11.25

Krispy Kreme (NYSE:KKD)

$3.85

*

(8.77%)

$2.91 to $13.93

Sources: The Wall Street Journal, Yahoo! Finance, Motley Fool CAPS.

Naughty?
Well, OK, we can't exactly call these stocks naughty. But none of them get much love from our Motley Fool CAPS community of amateur and professional stock pickers, which now numbers more than 65,000.

To the contrary -- when it comes to these stocks, CAPS investors have gone thumbs-down more often than film critic Roger Ebert. They don't believe any of these stocks are worth owning, and believe that some may be worth shorting.

Which of today's candidates is worst? Read on, dear Fool.

Worse
We begin with Krispy Kreme, which got dumped by Morgan Stanley (NYSE: MS  ) . The brokerage now owns just 1,074 shares, down from roughly 3.3 million in February.

What went wrong? My guess is this had something to do with it:

Metrics

TTM*

2006

2005

Return on capital

(0.9%)

(0.9%)

(8.5%)

Return on equity

(67.5%)

(45.0%)

(77.7%)

Source: Capital IQ, a division of Standard & Poor's.
*Trailing 12 months; numbers in millions.

Yuck. A cream corn-filled doughnut would go down easier.

Worser
Next up is Pozen, which now says it and partner GlaxoSmithKline (NYSE: GSK  ) will proceed with seeking approval from the Food and Drug Administration for Trexima. But they will do so without conducting any further clinical trials.

Risky? You bet, though Pozen and Glaxo may not have much of a choice. Here's how Foolish colleague Brian Orelli put it recently:

"The companies are under a time constraint: Trexima is a combination of the generic painkiller naproxen and Glaxo's migraine drug Imitrex, which loses patent protection in 2009. After both of those drugs have generic equivalents available, it may be hard for Pozen to get doctors to prescribe Trexima when prescribing two generics would serve the same purpose."

FDA approval may be difficult to come by, however. Just ask Penwest Pharmaceuticals.

Worst
But our winner is Downey Financial and its lending practices.

Downey, you see, was a heavy user of option adjustable-rate mortgages. These are the beasts that allow naive (or, dare I say it, ignorant) homeowners to opt to switch to interest-only payments at any time.

Since times were good and interest rates were low, Downey apparently allowed itself to write these loans for people who shouldn't have received a dime. Now they're defaulting, forcing Downey to more than double its reserve for bad loans to $144 million.

Did investors really not see this coming? Most, maybe, but not all. Here's All-Star BenThereB4, explaining his thumbs-down call in April:

From the most recent 8-K:

"The amount of negative amortization included in loan balances increased $37 million during the current quarter to $358 million or 3.56% of loans subject to negative amortization. During the current quarter, approximately 31% of loan interest income represented negative amortization, up from both 29% in the fourth quarter of 2006 and 25% in the year-ago first quarter."

Seems like a ticking time bomb to me, but this doesn't show up in the bottom line, yet.

Boom.

Downey Financial ... the worst stock in the CAPS world on Wednesday.

Do you agree? Disagree? Let us know what you think by signing up for CAPS today. It's 100% free to participate.

See you back here tomorrow for more stock horror stories.


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