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, though, 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 one-star ratings, but we'll head over to CAPS to measure players’ opinions on a company's prospects.

Then we’ll palpate the stocks’ 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, and the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are “yellow flags,” 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. Our primary screen illustrates those stocks to which CAPS investors have given one-star status. 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. As of Sept. 27, 2008.

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 -- like software makers and financials -- don’t neatly fit into the Altman Z-Score scale. Yet like the mythological figure of Charon conducting souls across the River Styx to the netherworld, we'll use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market.

Whistling past the graveyard
Perhaps it's not surprising that a number of these companies are tied to the housing sector, and when you think about how many speedboats people will actually be able to buy these days, it's understandable that Brunswick has shown up here as well. While MarineMax (NYSE:HZO) and West Marine (NASDAQ:WMAR) also report sliding sales, Brunswick's stock has fallen 60% over the past year as it has piled up losses and simply rolled over its long-term debt. That's led to liquidity concerns at the ratings agencies.

In contrast, Furniture Brands has been able to reduce its long-term debt, cutting it nearly in half over the past two years. Certainly, the dead housing market has hurt Furniture Brands' business, and rising unemployment makes the immediate future shaky, but over that two-year period, it has been able to sharply lower inventories, although operating expenses remain about even.

While the strength of its balance sheet might mean that it can stave off a worst-case scenario, as CAPS All-Star member shop1 noted back in April, it doesn't mean the larger macroeconomic picture won't continue to be a drag on performance:

This company has a lot of problems. From Jan 2005 to Jan 2008, its stock price has dropped 67%. At last report the company showed negative sales growth, negative income, negative EPS, negative return on equity and negative net profit.... With consumers cutting back on spending to compensate for increased fuel costs and increased costs of necessities, its unlikely that consumers are going to devote a lot of income to purchasing furniture. Thus, it is unlikely that [Furniture Brands] will be able to increase sales and profits or improve its financials within the near future. Despite having a dividend and yield of 0.16 (1.18%), an investor would fare better finding another company with solid financials.

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.