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. Revenue dries up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sickbay
Don't assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Here, however, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 145,000-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. Now, we'll head over to CAPS to measure their opinions on a company's prospects.

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. Given their one-star CAPS ratings, 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 whether 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.

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 get buried by the market.

Whistling past the graveyard
Maybe the market's recent surge wasn't the sucker's rally that was widely predicted, but it's easy to see that it was fueled primarily by government largesse. The Federal Reserve cut interest rates to zero, and the Obama administration poured hundreds of billions of dollars into the economy to prop it up. Unfortunately, the economy still stands on extremely wobbly legs. Unemployment remains intractable, consumer spending is weak, and banks aren't lending.

With that in mind, if you're looking at homebuilders as a possible investment, you've got to be extremely worried. The latest housing numbers released were dismal. Housing starts unexpectedly fell 4% in December, though unusually cold weather could be to blame, and the National Association of Realtors' index of pending home sales cratered 16% in November, after buyers hurried up to meet the original deadline for the federal tax credit. With the FHA tightening lending standards (finally!), there seems little reason to hope for a big surge in homebuying.

Homebuilders enjoyed a boost of confidence over the past year; Hovnanian saw its stock more than double, but it wasn't alone. Beazer Homes (NYSE:BZH) is up 250%, and Lennar (NYSE:LEN) was a double, too. The average homebuilder stock on CAPS was up 62% over the past 12 months. But with many such stocks starting to give back their gains, I suspect that the rally will turn into a rout.

CAPS All-Star member jed71 finds just too many variables stacked against Hovnanian for it to succeed:

High US unemployment rate, excess inventories across the nation, excessive home valuations given inventory levels, declining margins given shrinking home valuations will continue, home buyer's credit will not last forever.

Build up your case on the Hovnanian CAPS page, and let us know whether you think the homebuilders are a house of cards, or a house of bricks.

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.