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. Revenue dries up. Margins contract. Profits evaporate. All these signs suggest that the 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 85,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,400 stocks. A year's worth of data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks that look like they might be headed six feet under, having recently dropped from two stars to the lowest rating -- one star.

We'll also check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid-test" ratio) -- which gives us an idea of a company's ability to pay its bills. A current ratio above 1.5 and a quick ratio north of 1.0 means it's able to meet its short-term operating needs. But watch out! Too high a value might mean the company is hoarding assets that could be better used elsewhere.

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

Looking at the names on the list, you might be tempted to think that some of these need the ICU unit at most, rather than a cemetery plot. For example, despite reporting lower fourth-quarter profits, managed-care provider Matria has agreed to be acquired by Inverness Medical Innovations (AMEX: IMA). Still, the stock trades well below the price offered despite there being little likelihood of competing bids. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

Read all about it!
Back in its heyday, R.H. Donnelley was the directory king, publishing yellow pages, white pages, and various niche vertical directories. While it still publishes all of those books, harking back to 1886 in Chicago, when Reuben H. Donnelley published what is claimed to be the first telephone directory, the outlook for the print version is dark indeed. While you might still refer to these books, most people get their information elsewhere these days, which means advertising in those books is looking bleaker.

Donnelley has recognized that and issued some dour guidance. It also announced that it was forgoing its dividend and would focus all of its cash flows on paying down debt. Not a bad idea, considering where its liquidity ratios stand, but the decision to buy back stock last quarter might not have been the wisest use of cash, either. And while Donnelley does have its own Internet division for directory services, that segment head's decision to quit puts the company's outlook in doubt. Perhaps the best that could be hoped for with Donnelley is that, like Matria, someone will come along and offer an outsized premium for the stock.

Surprisingly, despite the prospects for a blowup, there's been a dearth of CAPS investors who have opined on Donnelley's potential demise. Only Imbythelake has written a underperform pitch, a little more than a week ago, suggesting that it's a turkey.

Instead, you have players like All-Star MattCraig, with a 95.76 player rating, who likes Donnelley's ability to generate positive cash flow even in a difficult environment and writes that the sell-off in the stock is overdone.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors just how you feel. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.