4 Deathbed Stocks?

Editor's note: A previous version of this article errantly included Agree Realty in the screen. However, because of Agree’s status as a real estate investment trust, the screen’s metrics do not readily apply to the company. The Fool regrets the error.

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 fully 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 140,000-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 their opinions on a company's prospects.

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, 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. The question is, with our primary screen being those stocks that CAPS investors have given one-star status to, 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.

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
Luxury homebuilder Toll Brothers isn't giving off signals that it's a house of cards about to fall over, but there's plenty to worry about even after its generally positive fourth-quarter earnings report.

Toll had a rather unexpected surge in new home orders while the cancellation rate plunged. The market certainly liked what it saw and Toll Brothers stock spiked higher (and it pulled Pulte Homes (NYSE:PHM) even higher), but when you look at the numbers more closely, you see that Toll's net new contracts represented just 765 homes. That's it. And like the Cash for Clunkers program that helped bolster the numbers at Ford (NYSE:F) and GM, we had the $8,000 first-time homebuyers tax credit encouraging people to buy a house they might not otherwise been able to afford.

No doubt pricing has been attractive on many homes, and mortgage rates remain incredibly low. The better news might mean there's more money floating around once again to finance home buying, but it also means the government's been funneling huge sums of cash into the housing sector to prop it up. That's not going to go on forever even if the tax credit was extended, so these are very ephemeral numbers to be basing a rebound call on here.

That is the basis, though, of CAPS All-Star JLuz expecting Toll Brothers to revisit its lows again: "shorting the pop ... housing still has a ways to go (as displayed by extending the first-time homebuyer credit)."

I also think housing has simply benefited from the government continuing many of the policies that got us into this trouble in the first place. With another train wreck on the horizon for mortgages, I'm heading over to Toll Brothers CAPS page to rate them to underperform the market averages. Use the comments section below to let me know whether I've built this argument on a shaky foundation.

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.