5 Deathbed Stocks

We’ve all head 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 will 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 115,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,500 stocks. Data shows that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared the worst. We’ve unearthed a handful of stocks that look like they might be headed six feet under and you might want to avoid as they’ve garnered no more than the lowest one-star rating.

Then we’ll check out some quick tests for liquidity -- the current ratio and quick ratio (also called the “acid test” ratio) -- which give us an idea of a company’s ability to pay its bills, and the Altman Z-Score which suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are “yellow flags,” between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the gravedigger is waiting.

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

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
*As of May 3, 2008.

We obviously don’t know if these companies are headed six feet under, so don’t short them based on their appearance here. Moreover, some companies don’t neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have marked down to one-star status, meaning they are possibly destined to seriously underperform the market.

A market disconnect
A deal to bring Internet protocol TV to India that will include live television, video-on-demand, and gaming. Couple that with a text messaging dream phone offered through Verizon (NYSE: VZ) and investors are beginning to think that talk of UTStarcom's demise may be premature. CAPS member xplorshinji thinks it's only a matter of time before it becomes a multibagger:

IPTV needs time to implement and roll out to the masses. Good headway in India and expanding outside of china. OPEX is still an issue resulting in cash burn. Once the contracts rolls in and more cost cutting happens, this stock should be a few bagger.

Supply chain management would seem to be a natural spot for the concept of software as a service under a more loosely defined rubric of cloud computing. Driving it will be new suppliers and falling prices, and while a suite of apps from Google (Nasdaq: GOOG) can't be dismissed either, it's just those sort of factors which CAPS member happyskippy sees as being the undoing of supply chain manager Ariba:

Supply chain is a great place to be but [Ariba] isn't it. Why?

Over paid managements, arrogance and poor execution. They have wrapped themselves in the Software as a Service software banner and that is what is driving much of the price runup. Wait til the IPO market opens up and other SaaS players are available to investors. Then let's see how they stack up.

For me, I am keeping my money in other places - not [Ariba]

CAPS member JPresbrown thinks investors have moved too early in bidding up Children's Place stock:

Everyone is so eager to be in consumer discretionary stocks before the economy turns that this stock has nearly tripled off its 52-week low. Good company, but an expensive stock. Recent push to $40 brought out heavy insider selling too. Dangerous stock to buy near highs with likely poor Christmas retail season ahead.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company’s financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made all from a stock's CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper’s at the door.