5 Deathbed Stocks?

• Email
• Share
• Print

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 make a full recovery. It happens, but here we're seeking companies that have all but given up the ghost.

For help, we'll turn to our Motley Fool CAPS community, where 130,000 members give the thumbs-up or thumbs-down to about 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed six feet under, 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, and 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 time is running out.

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
Ambac Financial (NYSE: ABK)	*	1.8	0.7	NA	$1.00
Leap Wireless (Nasdaq: LEAP)	*	1.6	1.3	0.79	$31.18
Pier 1 Imports (NYSE: PIR)	*	2.3	0.8	2.25	$1.77
Radio Shack (NYSE: RSH)	*	2.8	1.7	4.77	$10.80
Vornado Realty (NYSE: VNO)	*	3.1	2.5	NA	$45.27

Sources: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's.

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 given one star, meaning they could seriously underperform the market. New York Times, for example, which appeared here back in October, is in some dire straits after an exceptionally poor first-quarter earnings report.

Pull up a wicker chair
In the story about the biblical resurrection of Lazarus, he spent four days in the tomb. Home furnishings retailer Pier 1 Imports looks like it has been down for that long. It traded for pennies on the dollar last month, but in recent days, surprisingly, it has picked up. For all that, it's still looking very risky.

Investors have seized on its inventory reductions and the declines it achieved in debt. The company lowered its debt by $79 million by repurchasing notes at a steep discount. The problem is that these are not operational improvements, but rather moves to get its house in order. They're helpful and necessary to a point, but without sales to drive profits, Pier 1 may have problems again.

Sales dropped 11% in the quarter and comps were down almost 10%, leading to a loss of $29.4 million in the fourth quarter. That's better than what analysts had been expecting, and not so different from other home retailers like Bed Bath & Beyond (Nasdaq: BBBY), where profits were down 18%, and Williams-Sonoma (NYSE: WSM), where earnings were down 90%.

While the competitive landscape and promotional environment may have improved with Linens 'n Things' closing, investors may want to remain cautious about Pier 1. Wal-Mart and Target remain an ever-present threat, and as CAPS member PeteZar notes, the economy is dicey enough that consumers won't be flocking to its stores for tchotchkes and the like.

This run up will likely be a short one. In a rough economy like this people will not be turning to Pier 1 Imports to purchase things. This company does not provide any basic or common goods people truly need. They only provide decorations and furniture for the home. This economy is rough and we are not out of the woods yet, consumers are still very wary of the current economic situation and I highly doubt they will be rushing out and wasting their money on things they do not truly need, such as decorations and other things that can be found at Pier 1 stores. Do not be fooled by this run up. This stock will under perform until consumers are confident the economy has truly recovered.

Rattling the cage
Are these companies doomed to underperformance? Or will they turn things around? 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.