Monday'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 Monday:

Company

Closing Price

CAPS Rating (out of 5)

% Change

52-Week Range

Alliance Data Systems (NYSE:ADS)

$42.48

***

(35.24%)

$39.54-$80.79

MercadoLibre (NASDAQ:MELI)

$42.60

***

(21.20%)

$21.00-$81.17

Rediff.com (NASDAQ:REDF)

$8.80

**

(17.76%)

$8.17-$27.50

Systemax (NYSE:SYX)

$13.52

*

(13.28%)

$13.26-$31.16

RC2 (NASDAQ:RCRC)

$21.92

****

(5.60%)

$21.01-$45.75

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

Naughty?
Well, OK, we can't exactly call these stocks naughty. There are days when five-star winners and newsletter recommendations appear here. Today, for example.

But, if you're an investor, you'll have plenty of bad days. The trick is to avoid dating -- or, worse, marrying -- your losers. That's why I listen when our 82,000-person-strong Motley Fool CAPS community of stock pickers speaks with a poor rating or a negative pitch. You should, too.

Thus, here is today's list of the worst stocks in the world.

Worse
We begin with RC2, a personal favorite of my kids for its toys. Trouble is, a Wedbush Morgan analyst downgraded the stock Monday over rising costs and a weak retail environment. Fair? Who cares? This is all I need to know:

Metrics

Trailing 12 Months

2006

2005

2004

Return on capital

7.8%

11.6%

11.6%

9.8%

Gross margin

44.7%

47.2%

48.8%

49.9%

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

Lower margins. Lower returns on capital. Anyone want to bet that lower profits will follow?

Worser
Next up is MercadoLibre, which issued a prospectus after hours on Friday in which it said it plans to issue up to $292 million in new stock.

I'm rarely a fan of secondary offerings. Too often, early backers use them to cash out their holdings. We don't yet know if that's the case here, but with a strong balance sheet and a history of free cash flow, MercadoLibre doesn't appear to need this much fresh capital.

Now, here's what we do know -- and why this otherwise excellent company makes today's list: hours after the S-1 went live, MercadoLibre published a housecleaning 8-K describing personnel changes and other financial potpourri. In fact, the 8-K included everything but the most important news, which was buried in this form 99.1 attachment. Quoting:

Based on currently available information, we estimate net revenues of between $26.0 million and $27.0 million for the three months ended December 31, 2007. We anticipate our operating income margin, defined as income from operations as a percentage of net revenues, for the three months ended December 31, 2007, will decrease compared to operating income margin for the three months ended September 30, 2007. [Emphasis added.]

So, what, business is slowing? More information please.

Worst
But our winner is computer equipment supplier Systemax, which, according to an investigative report in Barron's, is failing to pass on manufacturer's rebates via its TigerDirect store and, as such, is under investigation by Florida's attorney general.

I'll not speculate as to whether Systemax management has committed a crime, but I won't be at all surprised if they're found guilty. Why? I've read the latest proxy statement.

The Leeds family, which runs and owns more than 70% of Systemax, is engaging in related transactions that, frankly, strike me as unseemly. My favorites:

  • Systemax leases its headquarters from a realty owned by the Leeds family.
  • CEO Richard Leeds and vice chairman Bruce Leeds are minority owners in a business that is in competition with Systemax. (Though on a limited basis, according to the proxy.)
  • Bruce Leeds' son is an employee of the company's insurance broker.

Exactly none of these setups is illegal on paper. But every one of them calls into question the seriousness with which the Leeds family views its role as a steward of the capital that shareholders have committed.

Systemax and its highly questionable management team ... Monday'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.


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