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 make a full recovery. Kmart climbed from the coffin of bankruptcy to become part of Sears Holdings, while United Airlines parent UAL recrossed the River Styx to fly the friendly skies once more. But in this column, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 83,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,400 stocks. A year's worth of data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks headed six feet under, having recently dropped from two stars to the lowest one-star rating. Are they only mostly dead, or have they truly given up the ghost?

You might be tempted to think that some of the names on this list need the intensive care unit more than a cemetery plot. Daimler, for example, the maker of the ubiquitous Mercedes, hardly seems in danger of going bust, particularly since it spun off Chrysler to private equity. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

A deadly contagion?
While clinical-stage pharmaceutical Pharmasset has enjoyed the best stock-price appreciation of the group, most of that increase has come within the past month, after the company reported promising results for its hepatitis C virus compound R7128. A phase 1b study found that the drug was able to lower the hepatitis C virus in certain patients to undetectable levels after four weeks, putting it on par with offerings from Vertex Pharmaceuticals (Nasdaq: VRTX) and ViroPharma (Nasdaq: VPHM).

So why might CAPS investors think Pharmasset is knocking at death's door, instead of lacing up for a marathon? As the Fool's Brian Lawler recently outlined, pharma giant Roche has worldwide rights to R7128, but it also has a competing compound, which it might want to promote instead of Pharmasset's drug. Also, while the results are promising, the trial only covers a very short time period. Only longer studies can demonstrate whether the drug's efficacy holds up.

Pharmasset's shares leapt back to life after the news, more than doubling in value, but they've given back some of those gains since. CAPS investor majakblue, who identifies himself as a geneticist and biochemist, finds more promise in a lottery stub than in the potential of a new biotech IPO:

It probably will outperform initially as investors raise the price artificially high, and then tank as it becomes clear that the company will not be profitable for years to come if ever. It would be a good investment if you want to time the market. ... As for me ... I think it is safer to invest in the lottery.

CAPS player zzlangerhans has also seen this kind of reaction before, and finds Pharmasset's likelihood of failure too great to bet on:

[T]he price bumped with positive phase I data for hepatitis C drug R7128. However, there has been a strong over-reaction given that this is phase I data. ... Many hepatitis drugs fail in late phase trials due to liver toxicity or simple lack of effectiveness with disastrous effects on the share price. ... [L]ater on a true decline may occur with negative news on R7128.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors just how you feel. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.