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:

Naughty?
Well, OK, we can't exactly call these stocks naughty. There are days when five-star winners or newsletter recommendations appear here. Today, sadly, is 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 99,000-person-strong Motley Fool CAPS community of stock pickers speaks with a poor rating or a negative pitch. You should, too. Here is today's list of the worst stocks in the world.

Worse
We begin with Starbucks. On Wednesday, after the market closed, it warned about frankly awful earnings. Here's how Foolish colleague Alyce Lomax, who owns shares of the coffee king, put it:

The latest tidbit of gloom came in the form of Starbucks' revised outlook. Starbucks said it now expects second-quarter earnings to come in at $0.15 per share, versus $0.19 per share in the same period last year, and for revenue to increase by 12%. Even more shocking, Starbucks said earnings for all of 2008 are now expected to be "somewhat lower" than the $0.87 per share the company reported last year.

Recently returned CEO Howard Schultz told investors that the slowing U.S. economy was mostly to blame. From a company statement: "The current economic environment is the weakest in our company's history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers." [Emphasis added.]

Fair enough, sir.

Nevertheless, I feel obligated to point out that the thesis for investing in Starbucks -- that it makes an addictive product that should persist during thick and thin -- is apparently no longer true.

Worser
Next up is Select Comfort, which is still teetering toward a cash-flow crunch. On Thursday, the mattress retailer reported a 22% drop in first-quarter revenue and a $7.1 million net loss on the bottom line.

Free cash flow, as classically defined, remained positive at $4.3 million, but I'm troubled by how Select Comfort achieved that feat. Management reduced working capital by $8.3 million, to "generate" free cash.

Essentially, this means that management tugged on accounting levers to keep cash "coming in." Slashing inventory and aggressively pursuing receivables are two examples.

There's nothing inherently wrong with careful working of capital management. But these "levers" can also be unpredictable. Depending on them to produce consistent streams of free cash flow is risky at best. Sometimes, it's meaningless.

Alas, that's the case here with Select Comfort. As Foolish colleague Jim Gillies pointed out in a discussion-board post for Motley Fool Hidden Gems subscribers yesterday, the company's so-called free cash flow resulted in exactly zero benefits on the balance sheet. To the contrary; debt was up by $5.6 million, and cash declined by $1.1 million.

Yuck.

Worst
But our winner is CNH Global, which copped to serious operational inefficiencies that prevented it from fully capitalizing on global demand for its agricultural equipment -- demand that has substantially lifted the fortunes of peers such as Deere (NYSE: DE).

CNH Global reported adjusted first-quarter earnings of $0.53 a share, well below Wall Street's consensus estimate of $0.65 a share. CFO Rubin McDougal was blunt in explaining the miss. Quoting from comments he made yesterday in a call with analysts: "On the ag side, we're dealing with a lot of inefficiencies. What we're finding is that we have very limited capacity for certain key components and ... that is causing a lot of schedule changes; it's causing a great deal of incremental cost ... and causing a lot of pain."

Translation: Demand is up, but we can't figure out how to meet it.

Wonderful.

CNH and its out-of-touch operations ... Thursday's Worst Stocks in the CAPS world.

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