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. For help in finding the ones that have pretty much given up the ghost, we'll turn to the clever coroners at our 145,000-strong Motley Fool CAPS community, where members have given 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, together known as 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." A score between 1.80 and 2.70 means the companies 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 are they alreagy goners?

Stock

CAPS Rating (out of 5)

Current Ratio

Acid-Test Ratio

Altman Z-Score

Recent Price

Avis Budget Group (NYSE: CAR  )

*

0.5

0.3

0.17

$11.90

iBasis (Nasdaq: IBAS  )

*

0.9

0.9

2.14

$2.98

Media General (NYSE: MEG  )

*

1.3

0.9

1.02

$8.56

Netlist (Nasdaq: NLST  )

*

3.7

3.2

2.68

$5.70

Zale (NYSE: ZLC  )

*

2.4

0.1

2.03

$3.17

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

We obviously don't know whether these companies are headed for the big sleep, so don't short them based on their appearance here. Moreover, companies such as 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
For a company that caused mighty temblors by rocketing 800% higher only a month ago, Netlist would appear to be an odd deathwatch candidate. Yet companies that were once wild penny stocks can often suffer volatile price swings.

In September, Netlist initiated a federal investigation against privately held semiconductor company Inphi, holding that the company infringed on one of Netlists' U.S. patents. However, late last month Netlists' stock plummeted 30% on news that Inphi had turned the tables on it by filing a patent-infringement lawsuit of its own.

The risk is that Inphi is suggesting that Netlist's new HyperCloud memory module violates two of its patents. HyperCloud has the potential to be a blockbuster for Netlist, because unlike Cisco's (Nasdaq: CSCO  ) own virtualization product, it allows you to overcome underutilized memory bandwidth and memory-capacity bottlenecks inside the module itself. At the same time, it has the potential to halve the number of servers needed for cloud-computing services, vaulting past current memory-limitation solutions. Hewlett-Packard (NYSE: HPQ  ) has even noted the ability of Netlist's technology to increase server memory capacity and bandwidth to enhance application performance on its own industry-standard servers.

But even before the lawsuit announcement, highly rated CAPS All-Star EverydayInvestor thought the hyper-run up on the HyperCloud news had more to do with a massive short squeeze than with anything fundamental.

Indeed, it's hard to argue with that viewpoint. According to the Nasdaq website site, Netlist's short interest went from just a little more than 6,000 shares mid-month to almost 1.3 million shares by the end of it. No doubt, with the stock at the highs it hit, traders piled in for the coming downside. We'll probably see those numbers change again when Nasdaq updates its figures.

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.

Fool contributor Rich Duprey has no financial interest in any of the stocks mentioned in this article. You can see his holdings. Try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy remains vibrant and full of life.


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