The No. 1 Stock to Burn Your Portfolio Is ...

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With the stock market continuing to head lower, you need all the help you can get to protect your investments from catastrophic losses. That's why we recently decided to turn our attention to dangerous stocks that could burn your portfolio.

Unfortunately, there's no shortage of those stocks around right now. But to find out which ones pose the biggest threat to your wealth, we looked to our Motley Fool CAPS community for guidance, and we asked you to vote. Let's look at which companies you thought were most likely to set off smoke alarms in this bear market.

Death by credit crisis
Honorable mention goes to a pair of financial stocks, Wachovia (NYSE: WB  ) and Ambac Financial (NYSE: ABK  ) . Each has become a victim of the credit crunch -- Ambac's bond insurance business has taken a hit from the evaporating demand for collateralized debt, and Wachovia faces a double threat of mortgage-related losses and potential liability for iffy practices related to auction rate securities.

Yet even though many believe it's only a matter of time before these businesses destroy shareholder value, others think the crisis has been overblown and see potential for a strong recovery. Who's right? Time will tell.

Crude reality
Third place goes to SulphCo, with its so-far unrealized business model of removing sulphur from lower-priced heavy-grade crude oil. As they consider production delays, declining output, falling oil prices, and aborted deals with larger producers, CAPS members are predicting continuing challenges for shareholders.

Our second-place choice was electronics seller Circuit City (NYSE: CC  ) . CAPS members agreed that the company's second-fiddle status to Best Buy (NYSE: BBY  ) meant trouble for the beleaguered retailer, and the failure of a potential takeover by Blockbuster (NYSE: BBI  ) killed many shareholders' hopes.

But as bad as Circuit City's losses have been, you can still measure them in millions. For truly huge losses, you have to go to the heart of the manufacturing sector.

And now, our "winner"
The top pick for the stock most likely to burn your portfolio is car giant General Motors (NYSE: GM  ) . Along with rival Ford (NYSE: F  ) , the U.S. auto industry is a favorite target for CAPS members looking for underperformers. Although there's a strong contrarian contingent that still holds out hope for Ford's prospects, the consensus on GM is much more negative. Labor challenges, slow responses to changing fuel prices, and increasing competition from Japanese automakers employing U.S. workers could well be the death knell for the debt-laden company.

Want to learn more about which stocks to buy -- or avoid? Try out Motley Fool CAPS for yourself. It won't cost you a dime, but the info it gives you could save you thousands.

Fool contributor Dan Caplinger has seen his portfolio get burned, but not by these stocks. He doesn't own shares of the companies mentioned in this article. The Fool owns shares of Best Buy, which is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy won't burn you.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 13, 2008, at 2:39 PM, Ishortyou wrote:

    AMBAC and MBIA are cracking open CDO-ABS-MBS-SIVs containing fraudulent loans. AMBAC is cracking open 84,000 of them, many rated triple A but the examination is revealing that those 'triple A' ones contain JUNK so it will take some time to remediate their books. The other suggested strategy is to sell their CDS and policy contracts on these triple A rated-JUNK to bottom feeders for an 'attractive price' with this they will achieve a good capital/liabilities ratio to regain their triple A status and write new public high quality business again.

  • Report this Comment On August 14, 2008, at 11:35 AM, DeerHunter73 wrote:

    Can you come up with something new for bond insurers. you worse then a broken record and so far proven wrong.

  • Report this Comment On August 14, 2008, at 11:43 AM, TMFMarlowe wrote:

    I dunno, Dan... I still tend to think GM is in the best position of the former Big Three, and I think 25 years from now it'll still be Toyota and GM slugging it out for global car dominance. I took a small position (I wouldn't suggest that any Fool take a big one) in GM under $9 a few weeks back. It might take a few years, but I think there's a good chance I'll be selling it at $40 or more. I might even get a dividend somewhere in there.

    Ford... Mulally is an absolute dream CEO, but he drew a very bad hand with this gig. They must execute FLAWLESSLY to avoid bankruptcy. They have no margin of error, much less than GM. I'm with Cramer on that one... Ford debt is an interesting play, Ford common not so much.

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