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 of 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. But we're seeking companies that have all but given up the ghost.
For help, we'll turn to the clever coroners at our 135,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,300 stocks. 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 pulse 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, and the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, while those between 2.70 and 2.99 are "yellow flags." Companies 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 mostly dead, or have they already breathed their last?
|
Stock
|
CAPS Rating (Out of 5)
|
Current Ratio
|
Acid-Test Ratio
|
Altman Z-Score
|
Recent Price
|
|
Alliance Healthcare Services (NYSE: AIQ )
|
*
|
2.4
|
2.0
|
1.32
|
$7.21
|
|
Barnes & Noble (NYSE: BKS )
|
*
|
1.2
|
0.1
|
2.92
|
$23.00
|
|
Jo-Ann Stores (NYSE: JAS )
|
*
|
2.4
|
0.4
|
3.72^
|
$20.80
|
|
La-Z-Boy (NYSE: LZB )
|
*
|
2.5
|
1.2
|
2.80
|
$3.63
|
|
USA Truck (Nasdaq: USAK )
|
*
|
1.2
|
0.9
|
2.58
|
$15.14
|
Sources: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's. As of Jan. 31, 2009.
We obviously don't know whether 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 remains the stocks that CAPS investors have given one-star status to, meaning they are possibly destined to seriously underperform the market.
Back from the grave
Even with the upgrade that La-Z-Boy received from an analyst last week, I wouldn't suggest kicking back with this stock anytime soon. Any business that must rely on rising consumer confidence and improving housing activity seems to be a shaky foundation to build upon. The furniture maker has suffered compounded annual declines on revenue and profit over one-, three-, and five-year periods. Plus, last quarter, the company had to revalue (read: write down) its assets as its market cap sank below book value. This is just more of the same that we've seen from La-Z-Boy.
It's true that the father of value investing, Benjamin Graham, enjoyed buying companies trading at a discount to their book value because the downside had so much protection while the upside was limitless, but sometimes stocks are cheap for a reason.
Like Ethan Allen (NYSE: ETH ) , which is consolidating operations, La-Z-Boy has closed stores, laid off employees, and suspended its dividend to save cash. It's also seen its upholstery business hit with a ball-peen hammer, with sales falling 30% last quarter, similar to the bashing Hooker Furniture (Nasdaq: HOFT ) reported last week.
There may be green shoots in housing markets, but that's more than likely to just be mold growing. CAPS member stockfreak1 finds La-Z-Boy's position less than inspiring: "Brokers evidently are now issuing 'Strong Buys' on hope? Fundamentally, lack of cash, recent inventory turnover and the big writedowns doesnt excite me much."
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.
RSS Headlines
Fool UK