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 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 89,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 stocks. The first year of collecting 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 one-star rating.

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 might need the ICU unit at most, rather than a cemetery plot. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions like Santander, for example, don't get measured by such ratios. Even so, stocks that CAPS investors have marked down to one star may be destined to seriously underperform the market.

Old MacDonald has some problems
But not so restaurant chain Bob Evans Farms. Like its hearty biscuits and gravy, increases in same stores sales have been fighting off the winter chill. Yet even though fiscal third-quarter profits recently came in 7% higher than last year on a 7% increase in net revenue, nearly a quarter of that revenue growth was attributable to customers failing to redeem gift certificates and gift cards. That's hardly a way to say your business is growing strong.

I've eaten quite a few breakfasts -- big breakfasts -- at Bob Evans over the years. I've enjoyed the meals, but with tough competition from Denny's (Nasdaq: DENN) and IHOP (NYSE: IHP) and rising costs, Bob Evans has some short-term issues. However, a dividend that yields 2% and a steady diet of buybacks would suggest that management feels the buffet is still open.

Investors at CAPS would seem to agree. While a third of them have marked the restaurant chain to underperform the market, CAPS bulls like slamberte5 feel that the positive dining experience will continue to attract customers.

A year ago, the industry analysts at Netscribe Restaurants noted -- in a response to their original analysis -- that smart acquisitions, consumer demographics, and a successful plan for new product introductions ought to keep the chain on a growth trajectory.

The company is adapting a strategy of growing through successful product introductions and additional points of distribution for its food products segment. Additionally at Mimi's it is eying to expand its alcoholic beverage selection ... to capitalize on the higher margins provided by specialty drinks. Moreover with the rising ... demand for convenient food outside home in the U.S. provides a great platform for Bob Evan's Farms to continue its growth track in the coming future.

While a worsening economy and tighter wallets might pinch Bob Evan's pockets, it seems that the undertaker is being held at bay.

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.