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 sickbay
Don't assume that all such companies are goners. Some will barely hang on, 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 125,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to nearly 5,400 stocks. We've unearthed a handful of stocks that look like they might be foundering, based on their having earned no more than the lowest one-star rating.

Then we'll put them through some quick tests for liquidity. The current ratio and the quick ratio (also called the "acid test" ratio) give us an idea of a company's ability to pay its bills; the Altman Z-Score suggests companies in danger of filing for bankruptcy protection. Companies scoring 3.00 and above are considered safe, those between 2.70 and 2.99 are "yellow flags," those between 1.80 and 2.70 have a good chance of filing for bankruptcy within two years, and those with scores below 1.80 mean the worst is expected.

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

Stock

CAPS Rating

Current Ratio

Acid-Test Ratio

Altman Z-Score

Recent Price

Affymax (Nasdaq: AFFY  )

*

1.8

1.7

(1.74)

$12.41

Apollo Group (Nasdaq: APOL  )

*

1.5

1.0

11.11

$79.87

Cubic Energy (NYSE: QBC  )

*

1.9

1.9

0.81

$1.86

Orient-Express Hotels (NYSE: OEH  )

*

1.0

0.5

0.89

$6.95

Timberland (NYSE: TBL  )

*

2.7

1.4

5.59

$11.59

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.*As of Aug. 30, 2008.

We obviously don't know where these companies are headed, so don't short them based on their appearance here. Moreover, some companies, like software makers and financials, don't neatly fit into the Altman Z-Score scale. Nonetheless, our primary screen seeks those stocks rated one star by CAPS investors, meaning they might be destined to seriously underperform the market. One of the stocks we highlighted in the past -- chip maker Qimonda, which first appeared here last July -- filed for bankruptcy protection last week.

Repeating a grade
With the economy in the gutter, many people think it's a good time to head back to school to bolster their skills and credentials for new opportunities. Apollo Group, through its University of Phoenix online campus, is there to help.

Some students apparently learned enough to file a lawsuit against the educator, alleging that it improperly sent back to the government loan proceeds they were entitled to receive, and then dinged them for the tuition costs. It doesn't take much more than a bit of eighth-grade math to figure that the last thing postsecondary education services like Apollo or Corinthian Colleges (Nasdaq: COCO  ) need is another scandal.

Even though it appears that Apollo is in no immediate financial danger, and that bankruptcy is not even on the horizon, CAPS member Option1307 is wary:

1) Massive insider selling

2) Huge lawsuits involving the majority of their revenue stream.

3) Way way overvalued.

Anyway you look at it, they need to come back down to reality. This lawsuit business could get really ugly, and even if it doesn't, it's still not good PR for this company.

No assurances given
Unlike Petrohawk Energy (NYSE: HK  ) , which is also invested in the Haynesville shale formation, Cubic Energy doesn't seem to have the financial wherewithal to survive low oil and gas prices for much longer. Its share of the reserves are located deep in the Haynesville field, and Cubic Energy must drill anywhere from 4,000 to 12,000 feet deep to extract anything. With oil and natural gas prices so low, it no longer makes much economic sense to pursue it. 

CAPS All-Star goldminingXpert has a lot of issues with Cubic Energy, saying this natural gas producer can't last:

why do I hate this stock? 3 cents a share of revenue and 10 cents a share of losses, along with a book value of 13 cents a share. Yet there is a market cap upwards of $200 million for this? Did I mention that Nat Gas lost half its value this summer-- and that is what Cubic supposedly is searching for?

Rattling the cage
Are these companies doomed to drag their investors to underperformance? Or will they succeed on 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 how you think they'll do.

Fool contributor Rich Duprey does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool's disclosure policy is full of life.


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