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. Here, we’re seeking companies that have all but given up the ghost. Who knows, maybe we'll still find some signs of life!

For help, we’ll turn to the clever coroners at our 125,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 stocks. Data show that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fare 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 palpate their pulses with some quick tests for liquidity -- who knows, maybe we'll still 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, while the Altman Z-Score suggests companies that are in danger of bankruptcy. For the Altman test, companies scoring 3.00 and above are considered safe. Those firms between 2.70 and 2.99 are “yellow flags,” and those between 1.80 and 2.70 have a good chance of going bankrupt within two years. A score below 1.80 means the crypt is imminent.

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. Data current as of Jan. 20, 2009.

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, such as software makers and financials, don’t neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have given one-star status, meaning they are possibly destined to seriously underperform the market. Circuit City, for example, which first appeared here back in September, filed for bankruptcy in December and announced last week that it would liquidate its assets

In the checkout line
Grocery stores that offer value to shoppers, such as Kroger (NYSE:KR), can end up in the express line during a recession, underscoring the chestnut that regardless of the economy, people still need to eat. For example, even 150-year-old grocer Great Atlantic & Pacific Tea Co. saw revenue jump 69% from the year-ago period, but that was due to its acquisition of the Pathmark chain. It remains a troubled company, with a cash position that's fallen at the same time debt has surged. Continuing operations swung to a $3 million loss, compared to a $73 million profit in the same quarter last year.

Investors, though, haven't given up on it, believing -- as CAPS member daharkleroad does -- that the recession will enable it to rebound:

in recession food sells, company is well managed, undersold, undervalued and management has bought big.

No (life) assurances given
A number of insurers, such as MetLife (NYSE:MET) and Genworth Financial, resorted to huge premium increases for long-term-care policyholders in order to offset errors in assumptions they made in estimating the amount of future claims. Conseco went a step further to insulate itself against the amount of additional capital necessary to sustain the policies. Now several states are looking to revoke the insurer's license for misleading its policyholders, causing ratings agencies such as Fitch to cut Conseco’s debt ratings. Financial pressures are mounting for the insurer, leading CAPS member EclecticRecluse to suggest the tide of public (if not investor) opinion is moving against Conseco: "Weak and Deteriorating Public Sentiment."

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.