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. 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 5,400 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 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. Those with scores below 1.80 mean the cryptkeeper 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.

We obviously don’t know for certain if these companies are headed for a dirt nap, 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.

Ruby Tuesday
When it comes to this casual dining chain, it's hard to choose which would be a more apt metaphor: the song "Goodbye, Ruby Tuesday" or the PR stunt it pulled this summer when it was going to blow up one of its stores.

Ruby Tuesday reported horrible earnings results that saw profits plunge 97% this quarter. Sure, the sour economy is hurting everyone, and Chili's operator Brinker International (NYSE:EAT) recently slashed its '09 guidance. Yet Yum! Brands (NYSE:YUM), home to KFC, Pizza Hut, and Taco Bell, was able to post better-than-expected results. So it's more than just tired decor that's leading Ruby Tuesday lower.

While CAPS members are closely split on whether Ruby Tuesday will outperform the market -- 53% say it will -- All-Star members are not so charitable, with nearly two-thirds who weighed in saying that it will underperform. Perhaps they think like mdriver78, who told us in June that the chain is caught in an ugly death spiral:

Once a food chain starts cutting back on advertisement, reduced traffic and declining sales follow. The Co is closing as many stores as it opens, cutting advertising, increasing spending to remake existing stores and revenues are forecast to decline for the next two quarters. Not a pretty picture.

ArvinMeritor
Like last week's case for Magna International, auto parts supplier ArvinMeritor is feeling the pinch of the global decrease in demand for cars and trucks. About two-thirds of its sales come from commercial vehicles, which are hard enough to gas up let alone fix up. The other third comes from SUVs, light trucks, and passenger vehicles. Ouch! 

Moreover, the company is heavily reliant upon receivables securitizations to finance its operations, and it needs to hope that the government's infusion of cash opens the credit markets. But with consumers not buying SUVs, banks not certain they'll even survive, and credit markets still dicey, ArvinMeritor will have a bumpy road ahead of it regardless.

Much as with Ruby Tuesday, investors in general are giving ArvinMeritor the benefit of the doubt that it will be able to outperform the market. All-Star members, on the other hand, are decidedly negative, with more than 80% who chimed in thinking that it will underperform.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected? 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.

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