Invasion of the One-Star Stocks

For more tales of financial frights, our Halloween special series, Avoid These 8 Investing Horror Shows, won't disappoint!

Your skin will crawl. Your flesh will creep. They're big and beautiful, but also evil and deadly, and they threaten to suck all the life out of your investments. Horrors! It's the invasion of the one-star stocks, run for your (financial) lives!

The story behind many of these low-rated stocks always sounds alluring enough, but if you're not careful to drive a stake through their heart, they'll keep coming back to haunt you.

They walk among us
Take, for example, Zion Oil & Gas (Nasdaq: ZN  ) , a development stage oil and gas exploration company. With oil priced in the $80 range, they'll be sitting pretty if they strike it. But the company's vision statement is based on the belief that the Bible hints at huge reserves buried undiscovered in and around Israel. It cites the books of Genesis and Deuteronomy as a prophecy that essentially serves as a treasure map, such as one passage where Moses sings:

He made him ride on the high places of the earth, that he might eat the increase of the fields; and he made him to suck honey out of the rock, and oil out of the flinty rock (Deut. 32:13)

You can almost believe there is oil there, too. After all, it's been found on all four sides, why not directly beneath it? Total found oil north of the Sinai Peninsula in the 1980s, though the wells subsequently went dry; Isramco discovered oil off the coast of Tel Aviv, but never enough to make it profitable; and Noble  (NYSE: NE  ) found a large gas deposit in the Tamar region.

Yet after another round of dilutive share offerings, investor enthusiasm is seriously lagging. With no revenue, Zion has to keep tapping the equity markets for cash. But after being at this for more than a decade without any results, investors are left to hope they won't end up wandering in the desert for 40 years.

Not of this earth
Here are four more well-known, once popular companies that will give you the heebie-jeebies when you look at their record of value destruction.

Company

3-Year Revenue 
Growth %

3-Year Net Earnings 
Growth %

CAPS Rating
(out of 5)

Crocs (Nasdaq: CROX  )

6.2%

(25.1%)

*

Hyperdynamics (NYSE: HDY  )

NM

NM

*

Sears Holdings (Nasdaq: SHLD  )

(5.6%)

(41.7%)

*

Hot Topic (Nasdaq: HOTT  )

(1.8%)

(24.4%)

*

Source: Capital IQ, a division of Standard & Poor's; Motley Fool CAPS. NM = not meaningful; Hyperdynamics has zero revenue and net losses over the most recent 12-month period.

Like Van Helsing on the prowl for vampires, the 170,000-member CAPS community has been hunting down stocks that prey on investors and driving the stake of a lowly one-star rating through their hearts.

  • Crocs returned from the grave like a zombie rising from the dead. Although its notoriously ugly plastic shoes have proved popular in certain industries, for the rest of the populace they are a fad. It walked away from that moldy past by branching out in new directions with more styles and more materials, but it risks succumbing to the faddish infection again by trying to run with Skechers (NYSE: SKX  ) and introduce a plastic "toning" clog.
  • Hyperdynamics is another company without revenues that's worked to convince investors it will be able to strike it rich with oil. In its case, it is plying the shores off the west coast of Africa, where there has been considerable oil found. Vaalco Energy drills in Gabon, while Hyperdynamics is off the shore of Guinea. Even China's CNOOC had once considered buying up oil rights in Africa, but the many countries on the continent are politically unstable. Hyperdynamics' agreements with the Guinean government might end up not being worth the paper they're printed on if civil unrest breaks out again.
  • Investors in Sears Holdings have long contended that the true value in the old-time retailer is not in its clothing or appliances, but rather in its real estate. Yet the CRE market continues to see pressure, as office vacancy rates hit 17-year highs. There may be value in the stores, but you're going to wait a long time to ever realize it. In the meantime, you have to contend with the financial shenanigans its hedge fund chairman, Eddie Lampert, uses to try and resurrect the retailer.
  • With back-to-school sales lifting retailers and the pause before holiday shopping beginning in earnest, goth-gear retailer Hot Topic looks as lifeless as the Living Dead Dolls sold at its stores. Same-tore sales fell for the 17th consecutive month and the investor interest that has generated outsized returns for SPDR S&P Retail ETF so far this year has avoided Hot Topic like it has the plague.

It won't just be witches and goblins you need to worry about this Halloween. These one-star stocks will rise again unless you put them down with a silver bullet. Head over to Motley Fool CAPS and give us your opinion on why the dead should stay dead.

Looking for additional scary stories? We've got what you need in our Halloween special series, Avoid These 8 Investing Horror Shows.

CNOOC is a Motley Fool Global Gains choice. Total is a Motley Fool Income Investor recommendation. The Fool owns shares of Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (18)

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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 October 29, 2010, at 11:36 AM, davelfla wrote:

    Trick or Treat - HDY at the door. But when you were a kid, how often did you get tricked? HDY has fallen from it's highs of a few weeks ago - making it a good time to get in (or back in). Still 100% over early September prices with some more treats in store for investors in the short to mid term. Look for JV Partner or other financing within weeks and 3D results shortly after new years. Possible dilution also awaits, as "play for the win" CEO Ray Leonard is trying to keep as much of the concession for HDY as possible. Don't believe the hype about losing the concession to political unrest - they should be good on that score as both parties view HDY's contract favorably.

  • Report this Comment On October 30, 2010, at 4:56 PM, TheDecider wrote:

    "But when you were a kid, how often did you get tricked?"

    Unfortunately, the stock market is not as nice as your neighbors handing out candy.

  • Report this Comment On October 31, 2010, at 7:24 PM, iwanna10bagger wrote:

    HDY is certainly not a 'widows and orphans' type of stock, but should not be dismissed out of hand, as the author of this article appears to have done. The company currently has ~ 105 million shares outstanding. I wouldn't be surprised to see this number increase to 150 million over the next few years.

    They have an offshore oil exploration concession area off of Guinea of about 10000 square miles. They are currently having 3D seismic done over ~ 20% of the area. Two independent estimates have been done by oil resource analysis companies, and both came up with unrisked estimates of 2.3 billion barrels of unrisked resources. If they actually discover only 1 billion barrels, and bring in a second partner, as they've discussed, which will bring their ownership down to ~ 50%, HDY's market cap should be something like 1 billion barrels oil reserve* value of $10/barrel of oil*0.5 (HDY's share)*0.6 (to account for production sharing with the govt of Guinea) = $3 billion dollars. Dividing this number by 150 million shares yields a potential share price of $20 - an 8 bagger from the current price.

    Of course, it's possible that they won't discover any oil (drilling is scheduled to begin about a year from now). It's also possible that they'll discover substantially more, so $20 per share is by no means the upper limit for the share price.

    As I said at the beginning though, this one is definitely not for widows and orphans.

    10bagger

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