The 10 Worst Recession Stocks

Last week, I published my updated list of the 10 best-performing stocks since the last recession, to help you identify the lessons that will help us this time around.

The study yielded some fascinating insights, not the least of which was that investors who keep their wits about them during times of maximum pessimism can truly make money on incredible stocks.

When my colleague John Reeves and I first began this study a year ago, we got some great email feedback from our Foolish readers, some of whom suggested that a piece on the 10 worst stocks since the last recession would also be helpful. And we knew taking that route would be fun.

To keep things interesting, I excluded bankruptcies and delisted stocks. Without further ado:

Company

Returns, March 2001-November 2001

Return on Equity*

Price/Sales*

CEO Compensation Per $1 Million in Sales*

Total Return, 2001-2008

Cell Therapeutics

11%

(52.2%)

-

$1,580,000

(100%)

Biopure

2%

(48.2%)

176.7

$116,000

(100%)

Young Broadcasting

(55%)

(2.33%)

1.69

$12,000

(99.9%)

Avanex

(75%)

(33.7%)

53.8

$3,800

(99.9%)

Targeted Genetics

(29%)

(124.9%)

22.1

$42,000

(99.7%)

Charter Communications

(41%)

(29.7%)

1.81

$800

(99.6%)

Sirius XM Radio (Nasdaq: SIRI  )

(90%)

(21.9%)

-

-

(99.6%)

Neurogen

(25%)

(14.2%)

35.5

$22,000

(99.6%)

BroadVision

(73%)

(23.9%)

9.9

$800

(99.6%)

Conexant Systems

(14%)

(21.8%)

1.8

$800

(99.6%)

10 Worst Average

(39%)

(37.3%)

22.1 (Median)

$24,900**

(99.8%)

Data from Capital IQ, a division of Standard & Poor's. Includes domestic and Canadian stocks traded over major exchanges and capitalized above $200 million as of Dec. 31, 2000. Note: Past performance does not necessarily indicate future performance.
*For the year 2000.
**Excludes the possible outlier, Cell Therapeutics.

Before I can share with you what accounts for these ugly returns -- and what you should avoid today -- a word about what wasn't responsible for their underperformance.

Stock price histories
While some of the worst recession stocks declined substantially during the actual recession (March to November 2001), others appreciated. This shows that beaten-down stocks can be great opportunities, but only if the company itself isn't doomed.

Some of the most startling cases include Qwest (NYSE:  Q  ) and Research In Motion (Nasdaq: RIMM  ) , both of which had fallen around by 60% during the recession but have since dropped by 90% and risen by 150%, respectively.

That's why, back in September, I warned investors not to touch value traps Citigroup (NYSE: C  ) , Lehman, and Wachovia. Those stocks appeared tempting to many investors, even though their businesses had deteriorated alongside their share prices.

Simply put, past price histories cannot tell you whether a company is undervalued or overvalued today.

With that out of the way, here are four things you should avoid:

1. No profits
What counts as "very profitable" varies by industry, but generally, you want to see companies with a return on equity of at least 10%. Every one of the 10 worst recession stocks lost money in 2000.

2. Too much debt
Several of the worst stocks had onerous debt loads. Too much debt limits a company's ability to take risks and increases the chances of a blowup, should the business hit a rough patch. The worst stocks didn't have a buffer between their operating incomes and interest payments and, in most cases, actually had negative operating income. (In fact, seven of the 10 worst recession stocks had no operating earnings with which to pay the interest on their debt!)

3. Overpaid CEOs
When I showed this list of worst stocks to Fool co-founder Tom Gardner, he immediately brought up the issue of executive compensation. At the Fool, we've always noted that excessive compensation can indicate that the folks in management lack internal motivation and may induce them to maximize short-term performance at the expense of their company's long-term health.

To take a recent example, Lehman Brothers CEO Dick Fuld -- whose salary, bonuses, and options from 2000 to 2007 came out to more than $15,000 per hour (even assuming 80-hour work weeks!) -- oversaw the destruction of a company that predated the Civil War. On the other hand, General Electric (NYSE: GE  ) is known for its generous payouts, but compensation is wisely tied to long-term operating metrics that managers can control, rather than merely to daily share-price fluctuations.

4. Steep valuations
Many of the worst-performing stocks were trading at steep premiums -- the median was an eye-popping 22 times sales -- made all the more absurd because they were so unprofitable.

Case in point: Charter Communications
Chaired by legendary Microsoft (Nasdaq: MSFT  ) co-founder Paul Allen, Charter became the nation's fourth-largest cable provider. It raked in almost $4 billion in annual revenue and added broadband subscribers at a breakneck 10,000 per week.

By 2005, cable modem subscriptions had surged from 608,000 to nearly 2 million, and the company was making distribution deals with popular TV stations including ESPN and major telcos Level 3 and Sprint (NYSE: S  ) .

But despite management's insistence in 2005 that it had "moved the company forward" by "tak[ing] advantage of exciting new opportunities" that would "create new standards of excellence" and "unlock unrealized value," we have been warning investors for years not to touch Charter with a 10-foot pole. As we wrote in January 2005:

  • Massive debt. Net debt (debt minus cash) is above $18 billion.
  • Net debt is 28 times the company's market cap of $640 million.
  • Charter was GAAP unprofitable, with $1.5 billion in yearly interest costs.
  • Debt covenants posed a serious threat to the company's survival.
  • The SEC had launched an investigation into Charter's accounting practices.
  • Heavy spending for a cable infrastructure hadn't yielded high enough returns.

Charter's chronic inability to earn profits on the nearly $15 billion in capital expenditures the company has made in its existence, plus an absurd $21 billion debt burden, have finally caught up: In 2008, management proved unable to keep "the company moving in a positive direction" and announced that it will file for bankruptcy protection by April Fool's Day.

"Some more color"
Now compare that story with the 10 best stocks since the last recession. Here are those numbers again:

Company

Returns, March 2001 - November 2001

Return on Equity

Price/Sales (median)

CEO Compensation Per $1 Million Sales

Return, 2001 - 2008

10 Worst Average

(39%)

(37.3%)

22.1

$24,900

(99.8%)

10 Best Average

64%

3.5%

1.8

$2,679

 

1,002%

 

Data from Capital IQ, a division of Standard & Poor's.

The contrast is revealing, and it shows that savvy investors can make a lot of money today if they look for companies that:

  • Are profitable.
  • Have limited debt.
  • Don't overpay their executives.
  • Trade at a reasonable valuation.

At Motley Fool Stock Advisor, we scour the markets for great companies exhibiting these characteristics. You can see what we're recommending today, as well as our top five stocks for new money, with a 30-day free trial.

Click here to get started. There's no obligation to subscribe.

Ilan Moscovitz owns no shares of any company mentioned. Microsoft and Sprint are Inside Value recommendations. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (78)

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 February 19, 2009, at 5:04 PM, annainpdx wrote:

    Thanks for the comments on executive compensation - I'm saving this article for arguments that so often come up about this issue.

  • Report this Comment On February 19, 2009, at 7:07 PM, xk8t56y wrote:

    Don't forget your recommendations, like:

    CSE

    Say

    AIB

    VDSI

    All have lost over 90% since motley fool has recommended them.

  • Report this Comment On February 19, 2009, at 10:22 PM, cranstonreid wrote:

    As I read this shameless "we told you so" promotional work of fiction, I was thinking exactly the same thing as xk8t56y. Their selective amnesia is all too evident as they hype their "expertise". MF once had a well earned reputation of excellence and responsibility.....now they have excelled only at useless rhetoric, bravado and purveyors of tripe.

  • Report this Comment On February 19, 2009, at 11:53 PM, aztoolfan68 wrote:

    wevebeenhad - Thank you for the laugh I've needed all day. I'm too nice to be that abusive, but your choice of words is colorfully delicious! Let's face it... the economy is in a free fall, and no stock is worth it's price. I'm still laughing!

  • Report this Comment On February 20, 2009, at 1:04 AM, TMFDiogenes wrote:

    Hey annainpdx,

    Glad you found the article useful. Executive compensation is a real problem in this country. I'm going to be writing another article about it.

    wevebeenhad,

    Sorry it came across to you as "we told you so." But it's really not fiction. As you can see, we've literally been warning readers every month for 4 years not to touch charter:

    http://www.fool.com/search/index.aspx?go=1&site=USMF&...

    I mention charter because it's a perfect example of the kind of stock you don't want to buy -- especially in a tight credit environment. It's a lesson I'm certainly going to remember. Hopefully others found it helpful too.

    Ilan

  • Report this Comment On February 20, 2009, at 12:53 PM, Shar54 wrote:

    No need to blame MF. Put this debacle clearly in the ballyhoo of Congress and the Pres. Everytime he opens his mouth or they vote, the stock market drops. We would be better off if they all just stayed out of it and the companies that are poorly run just fail and the ones that are profitable excel as they always do. This environment is causing fear and fear itself is running the stock market not profit, loss, debt, exec compensation, or any of the drivel above.

  • Report this Comment On February 27, 2009, at 1:59 PM, JohnFred3 wrote:

    MF used to be a lot more fun before they became so product focused but then a lot of things were more fun back in the day. I have always thought it interesting that one of their recurring and rock solid pieces of advice is that unless you are VERY smart and probably lucky you should invest in an index fund. Low fees and the performance will be better than most speculators or higher churn investors.

    I do not know if that piece of advice will retain value in the current environment. Certainly anyone who followed it has been hurt badly. History shows that things will turn around but history has more time than we do.

    The motto is Educate, Amuse and Enrich. I do believe the Gardner boys have continued to be educational and amusing. Enriching is a personal matter.

    On the whole I think their columns provide good value as long as the price is free.

  • Report this Comment On February 27, 2009, at 3:10 PM, Abnegazar1 wrote:

    I, too, remember a much better Fool back in the day. The Motley used to criticize those who ran their web-site much like they do today.

    Now, I don't have a problem with them charging a fee for their "stock consulting services", but the site used to be much more than having each newsletter basically sponsering a section.

    They promoted good spending habits, articles on keeping the debt down, general finance and other things that helped people in all areas of their financial life. Now, the Fool is all about promotion and "upselling" you to buying one of their newsletter subscription services.

    I subscribed to the primary one, the Stock Advisor for a period of time, and have to admit that I enjoyed reading it (although it's not worth the $200 asking price). I stopped last June as I had a bad feeling about the market in February of last year, and stopped putting new money in at that point in time (and paid of the remaining $60,000 of my wife's student loan during the rest of the year).

    The thing that bothers me, however, is that everything on the site is now geared towards marketing these newsletters and it misses the "friendly touches" that it used to have such as free message boards and that advice that was good fr those who needed the help. I don't see articles talking about having a short term rainy day fund, or what short term investment vehicles would be best.

    No, sadly, the Fool has become what it used to criticize, and that is a marketing machine that pumps up its products (which are now in low demand as few people want to invest in the stock market at present).

    It's sad, really...

  • Report this Comment On February 27, 2009, at 4:14 PM, michaelbinCA wrote:

    In a monkey see, monkey do world...

  • Report this Comment On February 27, 2009, at 9:03 PM, oviedopeo wrote:

    Sadly,

    I agree with Abnegazar1.

    I remember a time long ago when MF was the best most honest advice out there. I would recommend it to all that would ask me about investing.

    I took a chance and have subscribed to Stock Advisor and am not happy with the articles that tease me into reading them, and then want me to subscribe to yet another service, or sign up for free and then I have to cancel in time,

    I paid a subscription to save time, and find I spend more time skimming the marketing, looking for advice and not getting any benefit from my subscription.

    HEY MF, any chance this will get better?

  • Report this Comment On February 28, 2009, at 2:14 AM, nicko168 wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

  • Report this Comment On February 28, 2009, at 11:49 AM, gmogros wrote:

    Sadly,

    I agree with Abnegazar1 too.

    I thought I subscribed to a newsletter, yet I get a bunch of ads and promotion with some unrelated research or past success.

    Either I'm a greater Fool that I thought I was, or there are some Fools who think I'm one.

    Sadly, I've had enough.

  • Report this Comment On March 02, 2009, at 2:41 AM, loracrt wrote:

    I have not subscribed to any newsletters, and I'm not a high flyer investor. However, I have followed the The Fool's column in my Sunday paper for a long time. I found it to be interesting and educational - filled with advice for beginners and casual investors about how to proceed. and how to use low cost, reliable funds.

    With that in mind, I have be very disappointed with the Internet site. I expected it to be more informative and perhaps humorus. Instead, I feel like I have been to a "bait and switch" presentation - complete with

    teaser blurbs and "click here" spots that want me to send money.

    I understand that you want this endeavor to comensate you, but I must agree withAbnegazar 1 and JohnFred that you seem to be ignoring the needs of people like me in your pursuit of $$$

    I'm disappointed.

  • Report this Comment On December 14, 2010, at 3:06 PM, mikecart1 wrote:

    SIRI has gone from $0.05 to over $1.40. Yeah real bad investment!

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