Sometimes, we seem to hear a financial "death rattle" from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening.
Stocks in sick bay
But don’t assume that all such companies are goners. Some will make a full recovery, while others barely cling to life. We’re here today seeking companies that have all but given up the ghost.
For help, we’ll turn to the clever coroners at our 120,000-person-strong Motley Fool CAPS community, where members have given the thumbs-up or thumbs-down to some 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 based on their having garnered no more than the lowest one-star rating.
Then we’ll take their pulse with some quick tests for liquidity -- who knows, maybe we'll find some signs of life! The current ratio and quick ratio (also called the “acid test” ratio) give us an idea of a company’s ability to pay its bills, and the Altman Z-Score 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 cryptkeeper is waiting.
Here’s today’s list. The question is, are these companies only seemingly dead, or have they already started to fall asleep with the fishes?
|
Stock
|
Current Ratio
|
Acid-Test Ratio
|
Altman Z-Score
|
Recent Price
|
|
AMR (NYSE: AMR )
|
0.8
|
0.6
|
0.63
|
$6.85
|
|
Hovnanian (NYSE: HOV )
|
10.2
|
2.5
|
1.93
|
$2.22
|
|
Lennar (NYSE: LEN )
|
23.8
|
4.6
|
2.02
|
$4.78
|
|
USANA Health Sciences (Nasdaq: USNA )
|
1.1
|
0.5
|
10.35
|
$34.83
|
|
Wynn Resorts (Nasdaq: WYNN )
|
2.1
|
2.0
|
1.40
|
$33.57
|
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's; as of Nov. 19, 2008.
Now, don't short stocks based on their appearance in this chart. Who knows what tonics they might have in their medicine cabinets? 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.
Nothing stays in Vegas anymore
It took casino operator Las Vegas Sands (NYSE: LVS ) raising more than $2 billion in capital last week to remove doubts about its ability to remain a going concern. Wynn Resorts has had an easier time raising the stakes, and getting added to the S&P 500 index might create some investor demand as well. But gambling here at home has been sliding and appears to be cooling in Macau as well, where Wynn operates a casino.
CEO Steve Wynn feels his company remains in a healthy condition: "It's sort of like dancing at a funeral," he says. CAPS member phil27607 disagrees, writing that the debt-laden company is not a good bet during the economic downturn:
I recently went to Las Vegas, and spent time in the Wynn. Even with the giant casino, the $400 rooms, the 10% commision on sports betting, and the $12 Gin & tonics I drank, I don't imagine they're paying off that colossal building full of lights any time soon.
They've got too much debt, short-term expansion is grim, and there are too few people throwing away their money (although house advantage in Vegas is probably better odds than Wall Street these days).
Nothing to build on
It seems crazy that despite the glut of homes on the market, homebuilders are still building more, even if at lower volumes. Although that is their reason for existing, it also points up the belief held by many that there may simply be too many builders still around. Beazer Homes (NYSE: BZH ) may have serious issues and may have inadvertently triggered a change of ownership under IRS rules, which will jeopardize its ability to deduct the massive losses it's been recording. Hovnanian apparently adopted a rights plan to thwart just such an occurrence, but CAPS member livoniarules recently blogged that even though there will be some builders who will thrive, an implosion is on the horizon:
Any homebuilder with debt due (with barely any cash to cover) in the next two years through 2010 is toast....... additionally, I am not hearing from anyone about possible capital raises for the public builders beyond what we saw 6 months ago... the smart money is buying the debt at a discount now and taking control in bankruptcy court
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 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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