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:

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

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 95,000-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 PFF Bancorp, which, once again, is facing down bad loans with huge reserves.

And I do mean "huge." In January, PFF planned to set aside a sum comparable to the $34 million it had reserved the quarter before. Not this time. Now, PFF needs $120 million in loan loss reserves, up 65% from $72.8 million last quarter. Yeesh. That sounds as bad, if not worse, than the trouble following shaky loan specialist Irwin Financial (NYSE: IFC).

Worser
Next up is VeriFone, another former guest in this column, for committing errors that substantially delayed its financial reporting. An internal investigation was completed yesterday and the news isn't good.

Preliminary financial results show that increases in inventory and acquisition liabilities squeezed 2007 gross margin, which is now expected to decline from 46% in 2006 to 32%-34%. That's at least a 12-point decline.

That's ... just ... awful. But VeriFone makes our list because of this comment from its press release. Quoting:

As a result of the issues identified by management and the Audit Committee independent investigation, management has concluded that VeriFone did not maintain effective internal control over financial reporting. [Emphasis added.]

Internal controls are defined in and derived from the Sarbanes-Oxley law of 2002 and specify how firms should be able to manage operations with precision. A failure to maintain control over financial reporting is more than a math error -- it's a serious flaw in the business processes that determine how financial reporting is conducted.

Worst
But our winner is electronics retailer Rex Stores, which said that its full year net profit tripled. Wonderful, right? Wrong.

Let's move up the income statement a bit. Of the $39.8 million in pre-tax profit for continuing operations that Rex recognized, $23.9 million came from realized investment profit from its interest in alternative energy, including a sizable position in U.S. BioEnergy. Subtract that and then correct for taxes and that profit was up only 8% from 2006 to 2007. Same-store sales in its core business, meanwhile, were down 8%.

Rex invests in alternative fuel to ... Oh, who cares? It's an ad-hoc diworsification, and an unsustainable source of profits. Foolish colleague Russell Carpenter, know in these parts as TMFEldrehad, put it best last June, I think:

Let's see, an electronics retailer that has decided to branch out into alternative fuel, in this case ethanol? First, anyone who's spent any amount of time perusing my pick list or pitches knows what I think of the ethanol industry... [B]ut branching out in a direction completely out of line with the existing business is a daunting challenge at best. Given that this new business is ethanol, well... this looks like an pretty compelling underperform call to me.

Agreed. Rex Stores and its corn-fed business model ... Wednesday's Worst Stock in the CAPS world.

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