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 sick bay
Don't assume that all such companies are goners. Some will barely cling to life, while others 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 110,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 stocks. The first year of collecting data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks that look like they might be headed six feet under, having recently dropped from two stars to the lowest one-star rating.
First we'll check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid-test" ratio) -- which give us an idea of a company's ability to pay its bills. A current ratio above 1.5 and a quick ratio north of 1.0 means a company is able to meet its short-term operating needs. We've also added the Altman Z-Score to predict the likelihood of bankruptcy, but please note -- it's not designed to be used in every situation, and there are some limitations to it.
A company scoring 3.00 and above is considered safe, scores between 2.70 and 2.99 are in the "yellow flag" zone, scores between 1.80 and 2.70 mean the chance of going bankrupt within two years is good, and scores below 1.80 mean "Watch out below!"
Here's today's list. The question is, are these companies only mostly dead, or have they already given up the ghost?
|
Stock
|
Current Ratio
|
Acid-Test Ratio
|
Altman Z-Score
|
|
Brinker International (NYSE: EAT )
|
1.0
|
0.3
|
4.27
|
|
NVE (Nasdaq: NVEC )
|
5.0
|
2.8
|
56.05
|
|
Qimonda (NYSE: QI )
|
1.1
|
0.6
|
(0.68)*
|
|
Virgin Mobile (NYSE: VM )
|
0.5
|
0.2
|
0.84
|
|
Wendy's (NYSE: WEN )
|
1.2
|
0.9
|
4.21
|
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's. *As of March 31, 2008.
We obviously don't know if these companies are headed six feet under, so don't short them based on their appearance here. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the immediate future.
Spinning its wheels
One of the things I hate most about my Windows-based PC (and the list is really quite long) is the inordinate amount of time required to boot up. So even though it's wasteful, I leave it on all the time. That's why I’m hopeful that Linux-based computers using flash memory, which can turn on almost instantly, will become more prevalent in the marketplace soon.
The spintronics technology from NVE, which relies upon the spin of electrons rather than an electron charge to acquire, store, and transmit data, might make such fast memory boots a reality. NVE's fast memory design (called MRAM) could also be used in cell phones, PDAs, and the like, but only if the technology proves itself. Though NVE has had MRAM license agreements with Honeywell (NYSE: HON ) and Motorola (NYSE: MOT ) , its sales haven't been from this gee-whiz type of technology, but rather from more mundane products.
It's the prospect of intense competition and the possibility that it may be unable to commercialize its top technology that keeps some CAPS investors from adding NVE to their portfolios, while others are enamored with the technology and its ability to beat expectations (though it fell short of this last week). n8o remarks:
Really fantastic tech. A common sense approach to memory state change; designer molecules. I really could care less about the short term...this one's about long term patent strength.
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.
RSS Headlines
Fool UK