Deathbed Stocks Revisited

Last month I detailed how over the eight months we've been chronicling companies that appear to be on their deathbeds, two of the original 15 stocks have vanished. Since that column, however, three more companies highlighted in my series "Deathbed Stocks" have given up the ghost, one way or another: Fannie Mae, Merrill Lynch, and Lehman Brothers.

What we do is check for stocks that savvy investors in our Motley Fool CAPS community of more than 115,000 members have given the lowest rating -- one star -- and then pair that information with various financial ratios that seem to be flashing like a neon sign that the end is near.

In the first 20 months of CAPS, our data show that one-star stocks, the lowest-rated, have fared the worst, significantly trailing the S&P 500. The tales of woe left by the companies that have appeared in this column underscore that data.

Now that a third of those original 15 companies have gone under or otherwise disappeared, lets take a look at the next set of 15 stocks that were deemed to be on their deathbeds.

On the face of it, these stocks have performed much better than the original: they are only down some 2.5% on average. However, the average might be skewed a bit. For instance, Ikon Office Supplies got a big boost thanks to a buyout offer by Ricoh.

Yet even among the "winners," there seems some reason to doubt how well they will do in the future. Nautilus, for example, has seen losses widen, important products like its corporate treadmill unit discontinued (though they say they'll reintroduce another), and consolidation of its distribution centers. While a new CEO has the company on a turnaround program, the appreciation in share price would seem to have a lot of that factored in already.

On his CAPS blog, member WeeValue rummaged around in the trash bin back in May and found there was a lot to like about Nautilus, despite the many problems it faces, but notes it is a specific term play and not a buy-and-hold candidate.

Also, when considering a company like this, I like to keep in mind that a specific valuation target is important.  Given that they are average businesses, they are not likely to be long term winner, but getting back to fair value should provide good returns.  Unless something dramatically changes in the business, this is not a buy and hold investment.  It’s a buy, wait, hit or miss target and get out.

Another nice thing is that the outcome of this investment is going to have very little correlation to the over all market.  Nautilus will succeed or fail based on management’s ability to successfully right the ship – its not going to be related to interest rates, their ability to borrow or develop packaged securities.

On the other end is credit card issuer CapitalOne Financial that has seen shares bounce more than 57% above its summer lows. It's one of the reasons we urge investors to perform their own due diligence before buying or selling the stocks showing up in my regular column. Yet CapitalOne also offered up some caution today, warning that its exposure to many different industries and counterparties whose financial condition is uncertain may impact its own operations. Widening loan loss provisions may also impact the financial services firm, a concern of CAPS All-Star member jstegma who warned recently that credit cards are the next crisis to be confronted:

The credit card crisis is coming. When it arrives, you'll be able to buy this stock for [a lot less than it is now].

Rattling the cage
We'll be back to the normal column next week, identifying more stocks that are leaving investors feeling ill. In the meantime, 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 your favorite stock's CAPS page. Sign up today, absolutely free, and let us know whether you think a stock is headed for its demise.