supersupersuper

How do you find the worst stock for 2008? You identify a sector that's suffering badly, and then you channel your inner lion and hunt the slowest, fattest, weakest company in that sector.

The sector is easy enough -- homebuilders. But the company least likely to make it out alive, much less provide market-beating returns? I'm going with Beazer Homes (NYSE: BZH).

Bubble bath
First, let's talk about the beaten-up housing market, which has taken down the stock prices of homebuilders such as Beazer, credit-crunched financial companies such as Countrywide (NYSE: CFC) and Morgan Stanley (NYSE: MS), and many consumer-oriented, non-housing stocks as well. The homebuilder stocks, in particular, are riding so low that the value investors among us are starting to smell opportunity.

Before you leap, though, look back to the Internet bubble as a warning. Let's track the performance of the Nasdaq Composite Index, the one-time residence of many bygone dot-com upstarts. From January 1995 to its peak in March 2000, the Nasdaq rose nearly 600%. Then reality hit, and the Nasdaq plummeted almost 80% over the next two and a half years. It has since climbed steadily, but eight years after the bubble's peak, the Nasdaq still sits at about 50% of its March 2000 high. To generate healthy (though not spectacular, given the risk) annual returns in the mid-teens, an investor would have had to time the market's low point close to perfectly.    

So, with this history in mind, don't be too wowed by the massive stock drops I'm about to present. Sometimes, ugly is an opportunity, but other times, ugly is just ugly.

Worst house on the block ...
Let's compare Beazer Homes with some of its fellow homebuilders on debt, cash, inventory, free cash flow, and stock performance over the last year. Combined, these metrics give us a rudimentary view of how depressed these companies are and the magnitude of discount we get, given the risk. Keep in mind that the biggest wild card is how much further these companies will have to write down their inventories because of poor market conditions.

On one end of the spectrum is NVR (NYSE: NVR), which has lost 22% of its value over the past year but whose cash could roughly pay off its debt, leaving its inventory free to generate cash flow. On the other end is Beazer. Its stock has dropped by a whopping 89%, and among the companies on our list, it's encumbered with the highest amount of debt in relation to its cash and inventory positions. It's also the only one with negative quarterly free cash flow.

... and did I mention it has termites?
Right about now, you may be thinking the potential reward is worth the risk on Beazer. How much further could it fall? Um, well, all the way to zero, actually. Excluding inventory and tangible assets, a mound of debt with little cash and negative free cash flow leaves little value to this company.

Things are even worse than the numbers in our table indicate. Unlike the other homebuilders I've listed, Beazer's numbers aren't for its most recent quarter. Because of accounting irregularities that led to the firing of its chief accounting officer, the company is delaying the full release of its most recent numbers and restating its financials for the past few years -- including the numbers I've presented here, which are for the three months ended June 30, not its current fourth quarter.

There's more. Recent news surrounding Beazer has included the following carnage:

• An SEC investigation and a subpoena from the U.S. Attorney's Office in the Western District of North Carolina, regarding the company's lending practices.
• Sizable job cuts.
• Suspension of its dividends.
• The expectation of $230 million in impairments in its fourth quarter.
• Being forced to negotiate waivers on its debt defaults.
• A shareholder advisory group calling for the ouster of Beazer's CEO, who collected a substantial salary while presiding over the mess we've discussed and who sold $7.7 million worth of Beazer's stock in November 2006, less than two months before the stock's freefall.

Don't buy without a home inspection
Yikes! That's a heck of a lot more than just a bad balance sheet. There may be value in the housing sector for patient, long-term investors who do their homework, but Beazer looks bad. If you're convinced that Beazer is indeed the Worst Stock for 2008, vote by rating it an underperform in CAPS, our community-based stock rating service. We will announce the results in the next week. While you're waiting, stick around the CAPS website and see what 80,000 fellow investors are recommending. You're sure to find a better idea than Beazer.