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 130,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed for trouble, based on their one-star rating (the lowest CAPS offers).

Then we'll check their pulse with some quick tests for liquidity. 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, 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 protection within two years, and those with scores below 1.80 might be doomed.

Here's today's list. The question is, are these companies only mostly dead?

Stock

CAPS Rating

Current Ratio

Acid-Test Ratio

Altman Z-Score

Recent Price

Priceline.com (Nasdaq: PCLN  )

*

1.1

1.0

4.19

$82.37

Pennsylvania REIT (NYSE: PEI  )

*

0.4

0.4

NA

$2.65

Pre-Paid Legal Services (NYSE: PPD  )

*

0.9

0.6

7.91

$29.86

California Pizza Kitchen (Nasdaq: CPKI  )

*

0.3

0.1

2.51

$9.90

MI Developments (NYSE: MIM  )

*

1.3

0.9

0.41

$4.55

Sources: Motley Fool CAPS and Capital IQ (a division of Standard & Poor's). As of most recently available quarter.

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. Yet our primary screen remains those stocks that CAPS investors have rated one star, meaning they might be destined to seriously underperform the market. We noted last month that chip maker Spansion, which had appeared here last April, reported that its Asian subsidiary had filed for bankruptcy, and now it has filed itself.

A legal eagle
Even with the recession eating into travel plans and CAPS members dropping its ratings to one star, Priceline.com doesn't seem to be in any danger of going out of business anytime soon. Pre-Paid Legal Services, on the other hand, is under assault from the Fraud Discovery Institute, which has made a number of allegations and compares the company's business model to Bernie Madoff. Amid the general fear in the market, this drumbeat of negativity may be hard to counter.

Like USANA Health Sciences (Nasdaq: USNA  ) and Mannatech (Nasdaq: MTEX  ) in nutritional supplies, Pre-Paid Legal is a multi-level marketing (MLM) business; it uses a membership formula to offer legal services. With nearly three-quarters of Pre-Paid's memberships sold via its MLM base, the company admits its ability to grow revenues further depends in large part on expanding or enhancing its sales force. That reliance is at the root of negative allegations about the company.

Regardless of those allegations, there are more practical concerns for investors here. Membership sales fell rapidly, down 12% in the fourth quarter and off 18% for the year, while the number of new sales associates dropped 10% and 18%, respectively. It reported higher net income for the quarter, helped in part by a smaller income tax provision, but insiders continue to sell their shares even as the company authorizes new buyback programs. Although insiders can sell their shares for a variety of reasons, buybacks can sometimes prop up earnings per share in an unsustainable way.

CAPS member Buddytoo unabashedly favors Pre-Paid's business, arguing that new plans will draw customers. But others like fastflappraisals have a decidedly more jaundiced view. fastflappraisals writes:

Questionable business model. The accusation of being accused of a pump and dump business model along with a pay structure that does not add up. Within current conditions, there is the potential if the stock hits certain support levels there will be forced liquidation.

Rattling the cage
Are these companies doomed to drag their investors into 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 what you think.

Priceline.com is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days.

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.


Read/Post Comments (4) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2009, at 5:17 PM, IndianaWantsMe wrote:

    And what do we know about the Fraud Discovery Institute? I mean, beyond its "for profit" status and the stellar background of convict Barry Minkow (of ZZZZ Best fame)?

    It is remarkable how serious Minkow, who found religion in prison, takes himself and how much credibility news outlets give him.

    Praise the Lord and pass the libel.

  • Report this Comment On March 13, 2009, at 12:02 AM, hey4ndr3w wrote:

    Well, as long as we are talking about legal exposure, how about PPD's class action law suit in 2001 for fudging their numbers? How about FTC fines and other actions in 1997 for failing to disclose to their unsophisticated customers certain key terms of the service?

    Minkow may be a convicted felon, but that's hardly proof that PPD has clean hands.

  • Report this Comment On March 31, 2009, at 5:01 PM, teds31 wrote:

    Minkow is an idiot for one, and two PPD does have clean hands...otherwise it would not be endorsed by any attorney generals, and regarding that the business model is based up on membership sales, and that associates DO NOT GET COMMISSION OFF OF RECRUITING ASSOCIATES, proves that this is not an mlm scheme.

    if you consider this mlm scheme, then you might as well grab your torches and go after every real estate, insurance company, and car dealership

    simply put...people love to complain and call for witch hunts on any company...if you go to rip off report. you will see really unclear allegations... and this applies to any company such as wal-mart, best buy, etc....

    but ppd is part of the BBB, meaning that yes, there is credibility as an addition to the endorsement of attorney generals across the country.

    do memberships cancel? of course they do! what do you expect with the economy, but considering the performance of other companies, and that ppd is still going strong, it still leaves an impression compared to say..AIG or Citi

    I encourage everyone to visit http://www.prepaidlegal.com and to really go over what the company's aim is aside from profit. and considering what the company's plans offer (i have a membership and thank god i do), it covers respectively a lot of life events. as far as whether people feel they need it? well that's their decision and doesn't reflect on the company at all. it's like someone who tries to cancel their directv subscription or switch phone carriers. everyone has their personal reasons to change their minds

    performance compared to many other companies, is extreme, especially these days. i choose a company that has a strong track record, and has not even reached mainstream yet. similar to the cell phone phase. everyone thought a cellphone was not necessary, but today, our 6 year olds have one.

  • Report this Comment On May 29, 2009, at 3:40 PM, madmike192 wrote:

    I agree totally with teds31. This company even though its been in business since 1972. To me its a solid deal. The service it provides can be a great asset to everyone. I mean the legal plans that its offers can change a person's life in many ways.

    Having a Pre-Paid Legal plan is like having health or auto insurance. You may not need or use it now but eventually something will happen and thank god you were protected. Nowadays with the economy more people are more likely to be in court than be hospitalized and thats a fact folks.

    But like teds31. I encourage everyone to check out www.prepaidlegal.com and see what the company has to offer as far as the service goes. Don't be a critic if you haven't looked at the information yourself. One thing I've learned throughout my lifetime is to not trust another's opinion unless I know for sure they are right.

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