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Stock Watch

The 10 Worst Stocks of 2014

Not surprisingly, energy stocks dominate the list of the biggest stinkers.

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Plunging oil and gas prices wreaked havoc with energy stocks in 2014. Seven of the 10 worst-performing companies in Standard & Poor's 500-stock index either provide drilling services or explore for oil and gas.

See Also: 25 Best Stocks for 2015

And unlike in other years, when a big share-price drop might lead to a rebound the following year, analysts maintain that many of 2014's worst performers are likely to fare poorly in 2015 as well. "Offshore drillers had bad fundamentals that got worse with the drop in oil prices," says Robert Pinkard, an analyst with RBC Capital Markets. "There could be even more downside in the first half of the coming year."

Three offshore drillers are on the list of the S&P 500's worst performers. Transocean (symbol RIG, $18.79) surrendered 56%, making it the S&P 500's biggest loser. Noble Corp. (NE, $17.30) dropped 43%, and Ensco Plc. (ESV, $30.72) declined 41%. (The list of the 10 worst performers is based on data as of December 26; share prices and returns, which include dividends, are as of December 29 and are courtesy of Morningstar.)

All three are international operations that contract with big oil and gas producers—outfits such as ExxonMobil (XOM) and Chevron (CVX)—to operate offshore wells. As energy prices fall, the firms' customers are less likely to launch new projects, putting pressure on the drillers.

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Ironically, a year ago all of these companies appeared to be hot properties. That's because energy prices had been unusually stable; oil sold for roughly $80 to $100 per barrel for the better part of three years. That sparked demand for offshore and deep-water drilling and led to predictions of rapid growth for the industry. But as oil prices started to slide, from $105 per barrel in July to $55 in late December, those expectations were shattered. On the bright side, offshore drillers typically operate on long-term contracts, which can't be quickly canceled, so most drillers will continue to make money. But at best they will generate only tepid revenue and profit growth.

All of the other energy companies on the list of shame are involved in exploration and production, so their share prices closely follow swings in oil and gas prices. Shares of Denbury Resources (DNR, $8.22), a production company operating in the Rocky Mountains and Gulf Coast, surrendered 48% in 2014. Denbury has already announced that it will cut capital spending by 50% and keep production relatively flat over the next two years to conserve its resources while oil prices remain low.

The stock of QEP Resources (QEP, $20.01), which operates in shale basins in North Dakota, Oklahoma and elsewhere, dropped 34% in 2014. QEP recently sold its so-called midstream business—pipelines and energy-storage facilities—making it a pure play on the production of oil and gas. Wall Street worries that both Denbury and QEP may have trouble meeting their debt obligations if oil prices remain low for long.

Range Resources (RRC, $56.00) landed on the 10th spot of the worst-performers list, losing 33%. But Range may have better prospects than the market imagines because it has long-term leases on 1 million prime acres in the Marcellus shale basin in western Pennsylvania. That allows the company to commit to long-term production contracts required by big power utilitities. With production rising 20% to 25% a year, Range has both the experience and the reserves to be a major global player in natural gas, says Karl Chalabala, an analyst with CanaccordGenuity, a Canadian investment banking firm. His one-year price target: $76.

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The market may also have unjustly punished the stock of Freeport McMoRan (FCX, $23.26), which lost 35% in 2014. Freeport primarily mines for copper, gold and other metals, but it increased its stake in the energy business through a 2013 acquisition. Moreover, Freeport is almost immune to the recent slide in oil prices, says UBS analyst Brian MacArthur, because it has used hedging to lock in prices of $70 to $90 per barrel on 80% of its crude oil production for 2015. Meanwhile, the price of copper, which has been weak, has begun to stabilize. MacArthur thinks Freeport's stock is a great buy and expects it to reach $33 within a year.

The remaining companies that make up the list of top losers have no one to blame but themselves for their sorry performance, and they appear to have significant challenges to overcome before they can stage a turnaround.

The shares of Genworth Financial (GNW, $8.46), the S&P 500's sixth-biggest loser, plunged 46% in 2014. The insurer offers a range of financial products, from life and disability coverage to mortgage insurance and annuities. But this year's results are all about long-term-care insurance, says Steven Schwartz, an analyst with Raymond James. In mid 2014, Genworth launched a thorough review of its long-term-care business and determined that it had significantly underestimated the amount of money the company needed to set aside to handle future claims. During the third quarter, Genworth boosted reserves by more than $500 million and posted a loss of $844 million. The stock, which hit the skids in July when the company first announced the long-term-care review, got slammed again when the third-quarter results came out. Can the stock recover? Yes, says Schwartz. "But long-term care is going to be a long-term saga," he says. "It's going to be many years before anyone truly knows what the profitability is on these contracts."

Avon Products (AVP, $9.56), by contrast, has been experiencing a long, slow slide into oblivion. The beauty-products company, whose shares lost 43% in 2014, has been plagued by increased competition and a deteriorating base of sales representatives, who have become increasingly disgruntled because of the company's inability to deliver orders accurately and on time. With everyone from Esteé Lauder to Procter & Gamble and Unilever going after the same consumers, Avon has lost its competitive edge, says Morningstar analyst Erin Lash. Even at today's depressed stock price, Lash says the shares are "fairly valued."

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Likewise, Mattel (MAT, $30.77) has begun to look as dated as Barbie, the buxom plastic doll that has fueled the toymaker's growth since 1959. During the first nine months of 2014, Mattel's revenue dropped 14%, while profits plunged 35%. The company recently announced initiatives aimed at getting its executives out of conference rooms and back to the business of developing toys, and it replaced its marketing director with someone who successfully boosted Barbie sales in the past, says Linda Bolton Weiser, an analyst with the investment bank B. Riley & Co. Though both moves are positive, it could be a while before they result in improved profitability. For now, Weiser considers the stock a "hold."