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 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. Here, though, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 110,000-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.

First, we'll 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.

We've also added the Altman Z-Score to predict the likelihood of bankruptcy, but please note -- it's not designed to be used in every situation, and there are some limitations to it. A company scoring 3.00 and above is considered safe; scores between 2.70 and 2.99 are in the "yellow flag" zone; scores between 1.80 and 2.70 mean the chance of going bankrupt within two years is good; and scores below 1.80 mean "Watch out below!"

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

Stock

Current Ratio

Acid-Test Ratio

Altman Z-Score

China Eastern Airlines (NYSE: CEA  )

0.8

0.2

0.21

Finish Line (Nasdaq: FINL  )

2.6

0.5

4.05

JB Hunt (Nasdaq: JBHT  )

1.0

0.8

4.94*

OfficeMax (NYSE: OMX  )

1.7

0.7

2.27

Steak n Shake (NYSE: SNS  )

0.6

0.1

2.04

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
*As of 12/31/07.

We obviously don't know whether these companies are headed six feet under, so don't short them based on their appearance here. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the immediate future.

Shake, rattle, and rollover?
Somewhere between fish and fowl, Steak n Shake seeks to be a crossover between fast food and casual dining. Unfortunately, it hasn't done any better than any of its rivals, posting dismal second-quarter results last month. That's led to a shakeup in the boardroom, where dissident shareholders were elected to plant a stake in the heart of mediocrity. But will a moribund economy still cause this company to roll over and die? Top-rated CAPS All-Star Jeffreyw thinks it might be a possibility, at least as far as Steak n Shake's stock price is concerned:

PE of 34 for a fast food company in this economy is a bit too rich. I don't see massive growth here, until consumers feel better about the future (the whole consumer confidence thing.).

Office Minimum?
Specialty retail has been a difficult space in this economy, and office supplies are no oasis. OfficeMax is a third place also-ran behind leader Staples (Nasdaq: SPLS  ) and runner-up Office Depot (NYSE: ODP  ) . With Staples now fixated on the delivery business following its acquisition of Corporate Express, OfficeMax has fallen further behind the pack -- and perhaps become a target for a takeover itself.

Not everyone's convinced that OfficeMax can't still surprise to the max. Top-rated CAPS All-Star pnouri finds it cheap compared to the competition, though sometimes cheap companies are cheap for a reason:

This is a fairly well run retailer. While I do think this recession is not going to be a walk in the park, I think [OfficeMax] is a good play on the retailers. I think the extent to which their business declines as a result of the recession will be less than other retailers as businesses do need supplies. The only question is how competitive does pricing become in the space. It also has a high yield.

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.

Steak n Shake is a Motley Fool Hidden Gems Pay Dirt pick. Staples is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey 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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