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

R.H. Donnelley (NYSE:RHD)

$9.34

*

(47.53%)

$9.01-$84.49

Origin Agritech (NASDAQ:SEED)

$6.64

***

(30.83%)

$5.23-$14.99

PharmaNet (NASDAQ:PDGI)

$28.62

***

(30.79%)

$19.49-$43.05

MoneyGram International (NYSE:MGI)

$3.70

**

(19.39%)

$3.68-$30.67

DivX (NASDAQ:DIVX)

$9.79

**

(9.69%)

$9.70-$23.76

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, though not today.

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 85,000-person-strong Motley Fool CAPS community of stock pickers speaks with a poor rating or a negative pitch. You should, too. Here's today's list of the worst stocks in the world.

Worse
We begin with DivX, which said it had hired a new chief technology officer just a couple of days after shutting down Stage6.com, an alternative to Google's (Nasdaq: GOOG  ) YouTube.

Is the timing coincidental? Perhaps, but I find it curious that the press release announcing the new CTO takes a decidedly different tone than the accompanying 8-K. The release states that DivX's former tech chief will "continue to assist the Company in a consulting role." In the 8-K, we're told that he "resigned" on Feb. 27 and "is expected" to take on consulting duties.

Whether or not the linguistic nuance arouses the conspiracy theorist in you as it does in me, two things remain irrefutable:

  1. A major technology initiative failed.
  2. DivX has a new top techie.

Worser
Next up is R.H. Donnelley, which decided not to initiate a cash dividend after proclaiming a bountiful harvest of free cash flow in October. As Chief Financial Officer Stephen Blondy said at the time, "Our strong and stable cash flow enables us to distribute value directly to shareholders through healthy dividends, while continuing to invest in strategic initiatives and to repay debt." [Emphasis added.]

Translation: We have enough cash flow to pay down debt and fund a dividend.

But not just any dividend. Donnelley had expected to return as much as 25% of its free cash flow as a dividend. Sweet.

Or so it would have been. Donnelley went back on its dividend promise when it announced first-quarter 2008 results yesterday. Quoting CEO David Swanson: "[G]iven the recent decline in the share price and the near-term economic outlook, we have decided not to initiate a dividend in order to apply all cash flow towards debt repayment. I am confident that we remain well positioned for growth once we move past the current cyclical challenges."

Three things bother me about this. First, Donnelley said plainly that it "exceeded cash flow guidance" in the quarter. How do you exceed cash flow guidance -- in effect cementing the October rationale for a dividend -- and then not initiate the dividend?

Second, how do you call this business cyclical when advertising dollars have been increasingly shifting away from Donnelley and newspapers such as New York Times (NYSE: NYT  ) in favor of the digerati?

Third, irrespective of economic conditions, Donnelley should have known that committing 25% of cash flow to a dividend was, at best, wishful thinking. Why? Look at the cash flow statements from the past two fiscal years. In each case, depreciation and amortization and "other" -- rather than organic growth in the way of substantial net income -- accounted for more than 50% of cash from operations. Those gimmicks can't last forever.

Worst
But our winner is MoneyGram, a former guest in this column, poised for a bailout from a suitor.

No longer. Payments specialist Euronet Worldwide said yesterday that it would revoke its bid for the company. CEO Michael Brown told investors in a statement that the deal didn't meet Euronet's standard for return on investment, given the "current market environment."

You may wish to broaden that qualification, sir. I'm not sure MoneyGram is capable of producing returns in any market. Once again, here is a look at the company's history of capital destruction.

Metrics

Trailing 12 Months

2006

2005

2004

Free cash flow

($284.1)

($451.0)

$54.6

$776.2

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

MoneyGram and its cash-consuming bonfire of a business model ... 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 on Monday with more stock horror stories.


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