5 Deathbed Stocks?

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bay
Don't assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Sure, it happens. But here, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 125,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 stocks. We've unearthed a handful of stocks that look like they might be headed six feet under based on their having garnered no more than the lowest one-star rating.

Then we'll palpate their pulse with some quick tests for liquidity -- who knows, maybe we'll find some signs of life! The current ratio and quick ratio (also called the "acid test" ratio) give us an idea of a company's ability to pay its bills, while the Altman Z-Score suggests whether or not a company is in danger of bankruptcy. Companies scoring a Z-Score of 3.00 and above are considered safe, those between 2.70 and 2.99 are "yellow flags," and those between 1.80 and 2.70 have a good chance of going bankrupt within two years. Those companies with scores below 1.80 mean that the cryptkeeper is waiting.

Here's today's list. The question is, are these companies only mostly dead, or have they already given up the ghost?

Stock

CAPS Rating

Current Ratio

Acid-Test Ratio

Altman Z-Score

Recent Price

Brown Shoe (NYSE: BWS  )

*

2.0

0.4

3.48

$3.85

Landry's Restaurants (NYSE: LNY  )

*

0.2

0.1

0.84

$6.71

Macerich (NYSE: MAC  )

*

0.6

0.4

NA

$14.88

The Talbots (NYSE: TLB  )

*

1.4

0.4

2.25

$2.65

Washington REIT (NYSE: WRE  )

*

2.4

0.7

NA

$24.88

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's. Data as of Feb 12.

We obviously don't know if these companies are headed six feet under, so don't short them based on their appearance here. Moreover, some companies, like software makers and financials, don't neatly fit into the Altman Z-Score scale. Yet, our primary screen returns those stocks that CAPS investors have given one-star status to, meaning they are possibly destined to seriously underperform the market. Another of the stocks we've highlighted in the past -- this time the chip maker Spansion, which first appeared here last April -- reported that its Japanese subsidiary had filed for bankruptcy. Although the parent hasn't, its shares trade for just pennies apiece, and it is actively seeking a buyer.

Getting left back
Operating malls these days is a tough business. Not only are tenants facing tough conditions that are causing some to close up shop, but debt payments are coming due, and they're becoming increasingly difficult to pay. Just ask General Growth Properties (NYSE: GGP  ) -- itself on the deathbed watchlist -- which teeters on the edge of bankruptcy on a month-to-month basis and needs consistent extensions from its creditors to keep going.

Malls still remain ghost towns, even as regional mall operator Macerich reported fourth-quarter results yesterday that surprised analysts, with profits jumping 58% and funds from operations (FFO) rising 39%. Still, occupancy rates at Macerich properties fell 80 basis points, it's apparently being forced to accept lower rents in some locations (as is fellow mall operator Kite Realty Group (NYSE: KRG  ) ), and guidance for full-year FFO in 2009 was below analyst expectations.

Will Macerich's situation lead to trouble making its own debt payments? Although it has been trying to retire its debt, many analysts believe that Macerich may be one of the next real estate investment trusts to begin making dividend payments with stock, a dubious situation for shareholders, who get taxed on the distribution but don't see any cash. CAPS member GrahamJervis thinks the mall operator will soon run into trouble, saying that Macerich "[d]oesnt even make enough money to cover its debt, it will have to default on its loans or shed property at fire sale prices."

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.

Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey but does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool’s disclosure policy is full of life.


Read/Post Comments (2) | Recommend This Article (20)

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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 February 13, 2009, at 11:28 AM, Accountant2 wrote:

    Obviously this author did not read the transcript of Macerich's earnings call.

    The comments in this article are so off base as to be ridiculous. "malls are ghost towns" - yeah - to the tune of $440 of sales per square foot - down from $460 prior year. "Rents are declining" - over all, their re-leases were done at a 24% average INCREASE in rents - i don't call that declining rents. Will "make dividend payments with stock" - actually CEO indicated that would absolutely not happen as it would be too dilutive, given stock price at 3X FFO. And regarding "many analysts" - this is rated a 2.5 on yahoo, with 4 BUYS and 4 HOLDS.

    I continue to loose respect for the Motley Fool people more and more as time goes by.

  • Report this Comment On February 26, 2009, at 5:44 PM, Potomack3 wrote:

    WRE is a deathbed stock? How do you square this with your favorable inclusion of WRE in your 2/10/09 report "Real Estate Plays for Right Now"

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