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 a company’s condition is worsening -- they’re 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 end up making a full recovery. Here, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 93,000-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 dropped from two stars to the lowest one-star rating.

We'll also check out some quick tests for liquidity -- the current ratio and the quick ratio (also called the "acid-test" ratio) -- which give 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 mean the company's usually 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?

Stock

Recent Stock Price

1-Year Return

Current Ratio

Acid-Test Ratio

American Axle & Manufacturing (NYSE: AXL  )

$22.44

(18.19%)

1.8

1.2

Domino's Pizza (NYSE: DPZ  )

$14.04

(24.72%)

1.3

0.5

4 Kids Entertainment (NYSE: KDE  )

$9.97

(47.61%)

3.9

3.7

XL Capital (NYSE: XL  )

$30.49

(55.93%)

NA

NA

DivX (Nasdaq: DIVX  )

$7.11

(65.52%)

7.6

7.2

Sources: Yahoo! Finance; Motley Fool CAPS; Capital IQ, a division of Standard & Poor’s.

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, for example, don't get measured by such ratios. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

"You Got 30 Minutes"
Getting pizza delivered within 30 minutes is not the novelty it once was, and the dangers inherent in getting it there on time caused Domino's to drop its “30 minutes or less” campaign. Only recently has it brought back the concept of the half-hour delivery schedule -- but this time with no guarantees. Nor do there seem to be any guarantees as to how the largest pizza-delivery company will fare financially.

Domino's has been suffering from same-store sales declines, high costs of cheese and wheat, sliding margins, and higher interest expenses as it has taken on greater levels of debt. The pizza chain is also planning to shut about 60 stores and lay off several dozen employees to keep from getting burned.

New CAPS player Danimal13Valpo, who identifies himself (herself?) as a driver for the pizzeria, finds there is little to differentiate Domino's from rivals like Papa John's (Nasdaq: PZZA  ) or Yum! Brands' (NYSE: YUM  ) Pizza Hut. Further, this driver feels that the marketing campaigns it does use are for things that don't generate revenue for the company. Here are some excerpts from the early February pitch:

I have ... witnessed marketing flop after marketing flop... Domino's marketing campaigns are absolutely horrible and its more fixated on its old 30 minute delivery philosophy ... than profitability. Domino's lost the only competitve advantage it had when it decided to raise the price of the 555 Deal to $5.55 a piece... Pizza Hut has stuffed crust, Papa John's has long-standing specialty pizzas and chicken strips that don't cost an arm and a leg, and Domino's has literally NOTHING to offer... And when they do develop somewhat of a great idea, they say it's not profitable and pull the plug.

Earnings per share in the December quarter ended up falling short of expectations, representing a 57% decline.

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.

Fool contributor Rich Duprey loves the ponies 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 has a disclosure policy.


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