Deathbed Stocks Revisited

For more than a year we've been chronicling companies that appear to be on their deathbeds. As we note, not every company will give up the ghost, but since that original column, quite a few have either disappeared entirely or seen huge drops in their share prices: Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio to name just a few.

What we do is check for stocks that have received the lowest rating -- one star -- from savvy investors in our Motley Fool CAPS community of more than 145,000 members, then pair that information with various financial ratios that flash like a neon sign that the end is near.

Now that a third of the companies we've mentioned have gone under or otherwise disappointed, let's take a look at some of the stocks that were deemed by CAPS to be on their deathbeds last January.

Unlike previous visits back in time, where nearly all of the companies reported lower returns, this group has had mixed, and sometimes divergent, results. So let's look a little more closely to see if we can ascertain why some of these companies were able to recover while others with a seemingly similar dire outlook could not.

Whistling past the graveyard
When industry leading auto parts retailer AutoZone appeared on the deathwatch list, there were strong macro events developing in its favor: The recession was causing new car purchases to be postponed, making fixing your own car a more attractive option. The DIY market, where it has a 13% share, accounts for 84% of AutoZone's revenues.

The argument against the auto parts retailer rested on valuation, which seemed poised to fall in response to declining sales and slower comps. However, even though the stock was near its 52-week high at the time, a high short interest suggested a short squeeze could happen, sending it higher still.

And AutoZone did indeed shoot higher, rising as much as 22% over the next three months to a peak of $170 as the recession hit its nadir. Yet many investors remain down on its prospects, with more than one-third of those CAPS members rating the DIY specialist expecting it to underperform the broader market. For example, highly rated All-Star Junkyardhawg1985 wrote last month that, as a retailer, AutoZone continued to be valued at a level above what is appropriate:

Autozone should benefit from the reduction in new car sales causing more car repairs. This near term performance is already built into the stock price. At the end of the day though, Autozone is a retailer. They are a retailer with an enterprise value to revenue ratio of 1.45. Typical EV/rev ratios for retailers hover around 0.5.

I'd counter that AutoZone remains ready to benefit from prevailing market conditions. It's the largest aftermarket auto parts retailer, and it has enjoyed three consecutive quarters of higher same-store sales, even if the most recent quarter's number is slightly lower than the previous two. The Cash for Clunkers program took a lot of used cars off the roads, while pulling new car sales forward. Although that might make for a temporary dip, AutoZone CEO Bill Rhodes says it hasn't had a material impact on results.

With a quarter of its revenues coming from private label brands, AutoZone might be able to push through higher margins and grow further still. I'm heading to AutoZone's CAPS page and marking it to outperform. Join me there and tinker with your own rating or sound off in the comments section below if you think AutoZone is up on blocks.

Rattling the cage
We'll be back next week to identify more stocks that are leaving investors feeling ill. In the meantime, you can 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 a stock is headed for its demise.