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 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 in deep 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 are in even worse shape.
Here's today's list. The question is, with our primary screen being those stocks that CAPS investors have awarded one star, are these companies only mostly dead, or have they already given up the ghost?
|
Stock
|
CAPS Rating
(out of 5)
|
Current Ratio
|
Acid-Test Ratio
|
Altman Z-Score
|
Recent Price
|
|
Alaska Air (NYSE: ALK )
|
*
|
1.3
|
1.0
|
1.22
|
$37.15
|
|
BWAY Holding (NYSE: BWY )
|
*
|
1.8
|
0.9
|
2.11
|
$15.41
|
|
Beazer Homes (NYSE: BZH )
|
*
|
7.9
|
2.4
|
1.29
|
$4.21
|
|
Borders Group (NYSE: BGP )
|
*
|
1.0
|
0.1
|
1.63
|
$1.83
|
|
USA Truck (Nasdaq: USAK )
|
*
|
0.6*
|
0.5*
|
1.88*
|
$14.82
|
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
*As of Sept. 30, 2009.
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
Activist investor Bill Ackman of Pershing Square Capital Management gave Borders Group a reprieve last month when he publicly said the bookseller was in little danger of filing for bankruptcy protection. In fact, he said it was an even better investment than Barnes & Noble (NYSE: BKS ) and that the two might ultimately merge.
Shares in Borders rose sharply after the pronouncement, and have risen more than 55% over the past month. But Ackman owns more than 10.5 million shares of the company, a better than 17% stake, making him the largest shareholder by far. He has taken significant positions in other downtrodden consumer discretionary companies like Target (NYSE: TGT ) , which makes up more than 71% of his portfolio, so he's willing to put his money where his mouth is.
Although Borders carries a lowly one-star CAPS rating, members are leaning in favor of it surviving, with 60% of those rating it picking it to outperform the market averages. NinjaJew wasn't convinced last December, though.
Any company continuing to sell music, DVD, or [Blu-ray merchandise] at or near retail costs is merely wasting valuable floor space. Merchandise diversity cannot be met without competitive pricing, which Borders has never been capable of managing. A surefire bankruptcy target in the next five years.
Yet another billionaire investor, Ron Burkle, is betting that Barnes & Noble will be the real best-seller: His Yucaipa investment company recently increased its stake in that company to 19%. Both, though, might be putting their money into companies that are in their final chapter.
Head over to the Borders Group CAPS page and give us your read on whether or not you think it will succeed.
Rattling the cage
Are these companies doomed to drag their investors down? Or will they be revived? 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.
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