5 Deathbed Stocks

Editors' note: In an earlier version of this story, Chesapeake Energy was mistakenly included in the table instead of Chesapeake Corp. The Fool regrets the error..

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, 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 a company is 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

AMR (NYSE: AMR  )

0.8

0.6

0.75

Chesapeake (NYSE: CHK  )

0.5

0.3

1.36

Continental Airlines (NYSE: CAL  )

0.9

0.7

1.40

NYSE Euronext (NYSE: NYX  )

0.7

0.6

1.93

UAL (Nasdaq: UAUA  )

0.7

0.5

0.84

 Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

We obviously don't know if 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.

Fly me to the moon
I'm guessing no one is surprised that three airline stocks are on the list of companies possibly pushing up daisies soon. Yet as oil prices have pulled back for three straight sessions and the airlines themselves have initiated a series of maneuvers to cut back capacity, the industry in general has staged a rally of sorts, with the 14-stock Amex Airline Index (AMEX: XAL  ) rising 33% off the all-time lows achieved earlier in the week.

Equally helpful has been Continental Airlines' lower-than-anticipated loss. The airline benefited not only from increased international travel to Latin America, where the dollar has fared better than against the euro, but also from adding a second-checked-bag charge for some customers and several fuel surcharges and fare increases.

Investors like CAPS member iGetMoney8 sees Continental ultimately recovering because of its ability to pass on costs -- not to mention impose new ones -- on passengers. Besides, the industry has been through worse:

The airline industry is in a very unique position. With the price of oil (gas) escalating, people in the U.S. would rather fly than drive on their vacations. The airline may be paying more for oil, but that cost will ultimately be passed along to the passengers. This industry has been able to evolve with the times, and these times will prove to be no different. If the airlines could survive 911, surely they can survive a rise in oil prices.

No refunds or exchanges
Perhaps more surprising for its inclusion on the list is NYSE Euronext, which runs the New York Stock Exchange (as well as five additional cash equities exchanges in five countries, plus six derivatives exchanges). While the Motley Fool Rule Breakers recommendation makes money on both sides of a trade, even in declining markets, it seems doubtful that it will go under. Further, with its purchase of the Doha Securities Market in Qatar for $250 million, NYSE Euronext looks pretty healthy. It appears to remain a worthy competitor to the Nasdaq (Nasdaq: NDAQ  ) .

Even CAPS members like iceberg17, who rate the exchange operator as an underperformer, think it will be a good buy, though perhaps not just yet:

This is a great stock to buy later ... with all the fear in the market even the provider gets dinged for no rational reason.

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.

Nasdaq OMX Group and Chesapeake Energy are Motley Fool Inside Value picks. NYSE Euronext is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services 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. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 17, 2008, at 5:01 PM, tarzan2008 wrote:

    Continental Airlines does not charge for meals, drinks or the 1st checked bag. If you can't get the most basic facts correct in your article, then I can't believe any of it.

  • Report this Comment On July 17, 2008, at 5:54 PM, Spike991 wrote:

    I'm Glad to see your comments. Even though they are way off. As usual if We followed your track record on advice over the past four years it would have resulted in a loss of over 1300%. You keep putting out bad information which we make money on.

    Thanks

  • Report this Comment On July 17, 2008, at 6:58 PM, TMFCop wrote:

    tarzan2008,

    Thanks for the correction, and of course you're right. We've updated the article to reflect that it's only a fee for a second checked bag. As you've noted, meals and drinks still remain complimentary at CAL.

    However, that doesn't change the precarious position the airline is in and with fuel costs some 66% higher than last year it's weighing heavily on its wings. Yet it should also be noted that I don't say CAL will go under only that they're expected to seriously underperform the market as a whole.

    Still, that also doesn't change my mistake, which I regret, and I appreciate you pointing it out. Thanks!

    Foolishly,

    Rich

  • Report this Comment On July 17, 2008, at 8:27 PM, JakeBlues68 wrote:

    Saying CHK is on it's deathbed is pure insanity.

  • Report this Comment On July 18, 2008, at 9:41 AM, stocksportsfan wrote:

    I'm guessing you meant CSK not CHK.

  • Report this Comment On July 18, 2008, at 10:16 AM, frabis wrote:

    Confusing 1-star Chesapeake Corp (CSK) with 5-star Chesapeake Energy (CHK) really inspires confidence in the author's opinions....

  • Report this Comment On July 21, 2008, at 9:28 AM, oxord wrote:

    You would think that if you make a mistake the size of your lambasting Chesapeake Energy, you would have the integrity to write a retraction article. CHK Energy is one of your own Motely Fools most touted stocks. What gives?

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