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 we're seeking companies that have all but given up the ghost.

For help, we'll turn to our 145,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to about 5,300 stocks. We've unearthed a handful of companies that look like they might be in trouble based on their one-star ratings, but we'll head over to CAPS to measure the opinions on a company's prospects.

Then we'll run some quick tests for liquidity. The current ratio and the 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 filing for bankruptcy protection. Companies scoring 3.00 and above are considered safe, those between 2.70 and 2.99 are "yellow flags," those between 1.80 and 2.70 have a good chance of filing for bankruptcy 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 rated one star, 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 where these companies are headed, 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
Because Gander Mountain isn't able to compete effectively against larger rivals Dick's Sporting Goods (NYSE:DKS) and Cabela's (NYSE:CAB), which have also faced falling revenues in the recession, its two largest shareholders announced they want to take the outdoor sporting goods retailer private.

Interestingly, if you own 30,000 or more shares in the company, you'll remain a shareholder in the private company. Gander Mountain is planning a 1-for-30,000 reverse split and paying out $5.15 per share in cash to anyone who ends up owning less than one share; everyone else will stay on board. Naturally, that has drawn the scrutiny of lawyers who think small stakeholders may be getting the shaft; Gander Mountain's stock traded as high as $6.49 as recently as June and sports a book value of more than $6.00 per share. They'll argue that insiders are getting the company at a sweetheart price.

The CAPS community had long given the company the cold shoulder; it has had a one-star rating for at least two years. Only a third of those rating Gander Mountain thought it might have a chance of outperforming the market, and more than a year ago, it was burning through piles of cash.

Although there is a chance the lawsuits might affect the transition or a competitor could come in with a higher offer, the possibility ranks pretty low. Shares are trading below the buyout price, but there's not enough of a discount here to make it even an interesting arbitrage play. I'd suggest investors sit it out and see if Gander Mountain joins other companies that have appeared here before disappearing from the market.

It's quite probable it could return to the public markets in a few years' time when conditions improve. Deep discount retailer Dollar General (NYSE:DG), for example, recently came back because the dollar-store concept has proven quite popular in this recession. Of course, that doesn't mean Dollar General will be a worthwhile investment.

Rattling the cage
Are these companies doomed to drag their investors to underperformance? Or will they 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 what you think.