The Dogs of Wall Street

These stocks have lost value year after year. Is there any hope for them or are they permanently stuck at the pound?

There were some bumps in the road, but stocks are about to provide their fifth consecutive year of gains. Still, not all companies have benefited. Even as the Standard & Poor's 500-stock index has risen more than 20% in the past three years, many stocks have been stuck in reverse. A few stocks have done even worse, slowly losing value year after year.

Using database provider Capital IQ, we screened for the worst-performing stocks in the past three years. Why bother looking for the stock market's worst dogs? (Disappointing stocks are often called "dogs," even if man's best friend might resent the slur.)

For one, savvy investors often talk about the importance of examining your mistakes. The performance of these stocks are a lesson for investors, demonstrating how things can go wrong, and stay wrong, at previously well-respected companies. Plus, there might be some opportunities here for investors if new strategies or turnaround plans find success. Maybe, just maybe, these dogs have a chance to escape from the pound, and run free.

Still in Good Financial Shape

Our criteria: We were looking for companies that have disappointed investors not just once, but over and over again. So, we avoided the financial stocks that stunned investors with deep losses this year, or other stocks that plunged quickly on unexpected news. Instead, our dogs' declines have been steady. Almost all have lost half their value in the past three years, and all hit new lows recently.

Despite their poor performance, most of these companies are still in solid financial shape. We screened out companies that have fallen so far they're in danger of going out of business.

Looking at the list of stocks, a few themes emerge. Nearly all these stocks are in very competitive industries. The competition is so fierce that any mistake—a flawed product, a failed acquisition, or a botched sales strategy—can involve a tough recovery.

A number of the companies magnify their trouble by competing from a position of weakness as smaller players: Sprint Nextel (S) is the third-largest mobile-phone company in the U.S., and it's losing customers to larger rivals. Lexmark International (LXK), the printer maker, and the Cooper Cos. (COO), contact lens specialists, are also dealing with large, aggressive competitors.

Sometimes companies get stuck selling products that, because of various trends, fewer customers want. Brunswick (BC) has tried to revive interest in its boats and other recreational equipment like billiard and bowling supplies. The New York Times (NYT), like other newspaper owners, has battled falling print circulation and ad sales.

When Acquisitions Go Wrong

High-tech firms often stumble in the race to bring new, innovative products to market. Fitting this criteria are Lexmark; medical-device maker Boston Scientific (BSX); telecommunications equipment companies Alcatel-Lucent (ALU) and Nortel Networks (NT); Thomson (TMS), a provider of digital media technology; and Avid Technology (AVID), which makes video software and other multimedia tools.

The problem with falling behind in the technology race is that it's very hard to catch up, especially if the top firms attract more of the industry's talented engineers and designers, says Georges Yared of Yared Investment Research. Without the big brains on your payroll, it's less likely you'll provide customers with the next-generation technology they really want.

A number of these companies truly turned into dogs only after acquisitions or mergers. Sprint merged with Nextel. Alcatel joined with Lucent. Thomson has bought and sold a number of businesses. Boston Scientific bought Guidant. When acquisitions go wrong, the new, often dysfunctional company can end up paying for years and years.

Looking for a Turnaround Catalyst

A value investor is always hunting for cheap stocks with potential. But is there any hope for these stocks after three years of bad news? Are these companies due for a rebound?

Not so fast, Yared says. Investors in these firms need more than a change of luck. They must look carefully for "a catalyst"—a new product, strategy, or trend that will help these stocks regain their footing, he says. You "need to know what's going to make [it] sizzle."

Nearly all of these companies are trying hard: hiring new CEOs, buying or selling off units, investing in new products, and cutting costs. However, the chance remains that most of these stocks will remain in the dog pound for years to come.

Check out the slide show for a closer look at these stocks.

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