5 Deathbed Stocks

We've all heard of the "death rattle," the sounds from a dying soul's throat as the inevitable end approaches. We can hear it sometimes from the companies we invest in: Revenues dry up. Margins contract. Profits evaporate. These are the signs that suggest their condition is worsening -- gravely -- a financial death rattle, if you will.

Stocks in sick bay
Don't assume that all such noisemaking companies are goners. Some will cling precariously to life; others will make a full recovery. Today we seek the companies that have all but given up the ghost.

For help, we'll turn to the clever morticians at our 100,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,600 stocks. The first year of collecting data suggests that CAPS' highest-rated stocks performed best, and 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 one, the lowest rating.

We'll also check 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 these names, you might think some need a booster shot not a cemetery plot. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions, for example, aren't 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 earthly plane.

An injection for growth
Pharmaceutical companies often have high current and quick ratios, so Labopharm's high numbers aren't a cause for concern. However, they live and die by edicts of the FDA, and the agency's approvable letter for Labopharm's once-daily formulation of its pain reliever, tramadol, raises uncertainties about the company. The formulation has been approved in Europe, but the company admits its future profitability rests on getting approval for tramadol here in the U.S.

Last year top-rated CAPS All-Star investor msamet1 pointed out that product life cycle extension is crucial to such specialty pharmas' survival. His doubts led him to list it as an underperform back then: "Drug delivery and reformulation is a crowded sector and requires branded life cycle extensions for strategies to be profitable."

CAPS player Gumfactor noted last June, though, that Labopharm's tramadol formulation has been approved in other countries, which leads him to think the pharma will succeed. And we should point out that Labopharm is appealing the most recent decision of the FDA.

The stock has been beaten way down in the past month because of a 2nd 'approvable' letter from the FDA regarding tramadol. But tramadol just gained approval in Canada, and I anticipate that they'll eventually get this through the FDA as well. ... Meanwhile, the stock sits at a point too ... low for a company with DDSS' potential. Even while the market waits to see what the result of talks with the FDA are, I expect a healthy correction.

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 what you think. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at a company's door.