We all know of the "death rattle" -- the sounds from a dying soul's throat as the inevitable end approaches. It's the same sound Velcro fasteners make as they're pulled apart.
Sometimes companies we invest in give signs that the end is near: Revenues dry up. Margins contract. Profits evaporate. They're cues that their condition is worsening -- a financial death rattle, if you will.
Stocks in sick bay
But not all companies on the edge of the abyss will die. Some linger in a limbo-like state; others bounce back to live another day. Kmart climbed out of the coffin of bankruptcy to become part of Sears Holdings. Similarly, UAL, the parent of United Airlines, recrossed the River Styx to fly the friendly skies once again.
Yet what we seek here today are companies whose breathing is so labored and shallow that, for all intents and purposes, they've given up the ghost. To do that, we turn to the 79,000-strong investor intelligence community of Motley Fool CAPS.
Exploring the morgue
This investing platform rates stocks and investors and assigns a rating to each. Stocks get one to five stars (five is best), and players get numerical scores up to 100. With a year's worth of data to test, the morticians digging through the information have found that stocks with the highest ratings did best, while those with the lowest fared worst. Yes, I know -- "Duh!" But we can begin to use this data to our advantage.
Below are a handful of stocks that are close to becoming doornails. These have recently fallen from a low two-star rating to the worst, a one-star rating. Do they suffer from a bad case of flu, or is it the death rattle we hear?
|
Stock |
1-Year |
Recent |
|---|---|---|
|
Medifast |
(59.46)% |
$4.95 |
|
SLM |
(59.19)% |
$19.36 |
|
Fannie Mae |
(35.48)% |
$37.46 |
|
Playboy Enterprises |
(23.43)% |
$8.89 |
|
Lehman Brothers |
(20.21)% |
$62.19 |
Looking at the names on the list, you'd think some need an ICU unit rather than a cemetery plot. Lehman Brothers, for example, might be considered too big to fail, and Playboy had been treading water most of the year until the last quarter when earnings, appearing easy on the eye, spooked some investors to dump shares. However, stocks CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.
A student of failed marriages
If you've ever had to take out a loan to go to college, you're probably familiar with SLM, otherwise known as Sallie Mae, the student loan provider. It was a heady time for the company earlier this year, when private equity was still flush with cash. A group of buyers that included Bank of America
Then came the credit crunch. The buying group got cold feet and has back-pedaled right out of the deal, despite Sallie Mae's demand for $900 million in breakup fees. Now SLM finds its stock cratering too.
Compounding the effects of the failed merger, SLM's stock plunge put it on the hook for at least $1 billion to settle outstanding equity forward purchase contracts. It's being forced to raise $2.5 billion in a public offering that will be used mostly to buy back its shares to settle those contracts. The disastrous earnings call, where newly reinstated CEO Al Lord attempted humor that failed to get any laughs, did nothing to further positive opinions of SLM management or the stock.
CAPS investor nycguy thinks these episodes show ineptitude in the front office and sees SLM in for a bruising.
Needs a cash infusion to cover losses from equity swaps from the busted acquisition @ $60.00. I can understand writedowns due to lending operations, and even writedowns from hedging incorrectly. But this is simply dumb management. Time to get punished.
Other CAPS players, like All-Star chipotlepickle with a 99.23 player rating, also put the onus squarely on management. He notes simply, "CEO public meltdown" and gives SLM the thumbs-down.
Rattling the cage
Are these companies doomed? Should we pay them our last respects? Will they go on to a period of time in pain and penury -- with their investors? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors what you think. Sign up today -- it's completely free! -- and let us know whether you think the Grim Reaper is just outside the door.
