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

Closing Price

CAPS Rating
(5 max)

%
Change

52-Week
Range

Kingsway Financial (NYSE:KFS)

$11.82

**

(22.03)

$11.62-$22.01

Darden Restaurants (NYSE:DRI)

$28.60

**

(21.30)

$28.30-$47.60

Hovnanian Enterprises (NYSE:HOV)

$7.44

*

(11.43)

$6.75-$37.58

The Finish Line (NASDAQ:FINL)

$3.00

*

(7.69)

$2.93-$14.78

Palm (NASDAQ:PALM)

$5.52

*

(6.91)

$5.24-$19.50

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 gets much love from our 78,000-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 they think some may be worth shorting.

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

Worse
We begin with Canadian insurer Kingsway Financial, which increased its loss reserves for the second time in a few months. Quoting from Kingsway's press release:

Following further review of trends in claims development at its Lincoln subsidiary including the updated indications provided by the Company's external appointed actuary, the Company expects to increase its claims incurred by between $95 million and $125 million during the fourth quarter ... The impact of this reserve increase on the Company's net income will be a reduction of between $79 million and $105 million, or approximately $1.41 and $1.87 per share, for the fourth quarter and fiscal year 2007. [Emphasis added.]

Kingsway booked $16.8 million in net income in last year's Q4.

Awful, eh? No doubt. Kingsway would rank even lower on today's list if it weren't for an early November commitment to repurchase as much as 2.8 million shares of its stock on the open market.

Worser
Next up is Finish Line, which yesterday concluded a courtroom tete-a-tete with peer Genesco. Finish Line is trying to back out of a $1.5 billion deal to acquire the company.

The athletic-shoe retailer makes today's list for comments made by its lawyer. According to reporting by The Associated Press, attorney Robert Walker said that Genesco's poor second-quarter performance corrupted Finish Line's projections, which included an assumption that its new partner would produce 70% of the combined company's cash flow.

Really? Please tell me it isn't so. Have a look at Genesco's history of free cash flow, or lack thereof:

Numbers in Millions

Trailing 12 Months

2006

2005

2004

Cash from operations

$76.2

$70.6

$105.0

$99.8

Capital expenditures

($80.0)

($73.3)

($56.9)

($39.5)

Free cash flow

($3.8)

($2.7)

$48.1

$60.3

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

Enough excuses, Finish Line. Complete the deal or pay whatever penalty Genesco has coming.

Worst
But our winner is ailing homebuilder Hovnanian Enterprises. Moody's said it would review the firm's debt on Wednesday, leaving open the possibility of a downgrade. That's a threat Beazer Homes (NYSE: BZH  ) and Lennar (NYSE: LEN  ) have faced in the past, and one Hovnavian investors should take seriously.

I rank this stock star worst because of the head-fake CEO Ara Hovnanian made in commenting on his company's fourth-quarter earnings: "Considering the challenging market conditions that homebuilders are continuing to face, we are pleased to have exceeded our expectations for cash generation in the fourth quarter and to have paid down our debt levels more than we projected. [Emphasis added.]"

That's true. Hovnanian says it booked $376 million in positive cash from operations during the quarter.

Yet that cash flow came from inventory reductions, combined with write-offs and $216 million in non-cash tax charges during the quarter. How much of that is sustainable? Not much, I'd say. Total notes payable (debt) are up year over year.

Worse yet, gross margin (including interest) was down 5.7 percentage points from the previous quarter. (And down more than 10 percentage points year over year.)

Color me unimpressed. Here's the real question, Fool: How much cash flow will Hovnanian produce when the one-time goodies are no more? You know the answer. Hovnanian Enterprises and its head-faking management team ... Wednesday'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.

I'll be back tomorrow with more stock horror stories.

For every post you make to CAPS or any Foolish discussion board in the month of December, The Motley Fool will donate $0.02 to charity. So give us your two cents, and we'll pay it forward!


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