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, however. Some will barely cling to life, but others will make a full recovery. Here, though, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 150,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 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 members' opinions on each 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 crypt-keeper 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 and 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
Considering it only just returned to the public markets, Dollar General doesn't seem to be a candidate ready to be fitted for a casket, but with its private equity investors seeing a big payday with the IPO, it isn't necessarily a stock you'd want to climb into bed with either.

Similarly, as bad as the housing industry is, home-materials maker James Hardie Industries was able to post an operating profit last quarter 4% above that generated in the year-ago period, even though sales fell by 11%. The company is scheduled to post third-quarter results tonight that no doubt will be just as challenging. But with a few homebuilders reporting better-than-expected results, Hardie might surprise as well.

That doesn't mean investors are rushing in. CAPS member Grinch18 correctly notes there's still a lot of inventory the market has to work through: "There is still a large overhang of new homes available on the market. This leads to a depressed need for new construction for the next year or two."

So who might be at risk most? Given that it's soared as much as 3,600% from its low point last March, auto-parts maker ArvinMeritor might seem an unlikely candidate, particularly when you add in sales at Ford (NYSE:F) and government-owned GM showing remarkable resilience lately. But the folks at Audit Integrity seem to agree there's some outsized risk in this highly leveraged parts company. A recent Forbes article notes that risk is higher than at 99% of the 2,700 companies studied.

Two-thirds of the CAPS members rating ArvinMeritor have rated it to outperform, but the one-star rating suggests they think there are much better places for your money. Cobble together the parts of an opinion on the ArvinMeritor CAPS page and let us know whether it's ready for the junk heap.

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.