Thursday'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 Thursday:

Company

Closing Price

CAPS Rating (5 max)

% Change

52-Week Range

Lifeway Foods (NASDAQ:LWAY)

$10.60

**

(22.74%)

$7.85-$20.75

AFC Enterprises (NASDAQ:AFCE)

$11.03

*

(11.12%)

Not avail.

Shutterfly (NASDAQ:SFLY)

$26.70

**

(10.97%)

$13.20-$37.00

Fannie Mae (NYSE:FNM)

$43.04

*

(10.00%)

$42.16-$47.06

Downey Financial (NYSE:DSL)

$30.76

*

(9.85%)

$28.37-$75.06

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 74,000-person-strong Motley Fool CAPS community of amateur and professional stock pickers.

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 that some may be worth shorting.

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

Worse
We begin with mortgage financier Fannie Mae, a Motley Fool Inside Value pick, which, along with sister firm Freddie Mac (NYSE: FRE  ) , is still out of compliance with federal regulations. Quoting a report issued by its regulators onThursday morning:

In 2007, both enterprises continued to make progress, but neither company has completed all of the items identified in their consent orders.

Consent orders limiting the size and scope of Fannie Mae's mortgage portfolio were issued in May 2006, after a three-year investigation uncovered serious accounting issues. Apparently not all of them have been resolved.

Growth with a ceiling? Sounds like a winner of a stock to me. In Bizarro Fooldom, that is.

Worser
Next up is digital photo diva Shutterfly, which was down for reasons not yet reported. But richly valued stocks that boast no competitive advantage can be like that.

I'm serious. What does Shutterfly do that others don't? Sure, there are those photobooks, but I can't envision American Greetings (NYSE: AM  ) and Kodak being more than a quarter or two away from offering excellent alternatives.

And it's not like management is producing excellent returns while Shutterfly has a lead. To the contrary:

Metrics

Trailing Twelve Months

2006

2005

Return on capital

2%

4.2%

7.3%

Return on equity

5.1%

5.4%

76.8%

Source: Capital IQ, a division of Standard & Poor's.

CAPS All-Star maverickpl put it best last month, I think. Quoting: "Who is buying this at over 100 times earnings? My only logical explanation is that they've discovered time travel and whisked themselves into the late '90s."

'Nuff said.

Worst
But our winner is Lifeway Foods, which isn't an easy call for me. I like what the company is trying to do: make healthy dairy products. Good idea.

Trouble is, the business depends on milk, and milk can apparently get really expensive. Gross margin declined by four percentage points in Q3 thanks to record prices.

Here's how Lifeway CEO Julie Smolyansky put it:

Despite record high milk and transportation costs, as well as operating in an environment where most of our other production-related costs are increasing, we were able to maintain relatively healthy margins. The cost of milk hit a record high in the month of September, and has since dropped slightly in October, a trend we hope but cannot be assured of continues. (Emphasis added.)

Translation: Production costs are mostly out of our hands.

Scary thought, isn't it? It is for me, especially after looking at the cash flow statement, which you can find on page 7 in the 10-QSB report filed with the SEC. Free cash flow fell by 75% through the first nine months of 2007.

Yuck. Perhaps Lifeway should raise cows and buy some pasteurizing equipment?

Lifeway Foods and the milkmen who are drinking up its margins and cash flow ... Thursday's worst stock in the CAPS world.

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 Monday for more stock horror stories.


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