Deathbed Stocks Revisited

• Email
• Share
• Print

For more than a year we've been chronicling companies that appear to be on their deathbeds. As we note, not every company will give up the ghost, but since that original column, quite a few have either disappeared entirely or seen huge drops in their share prices: Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio to name just a few.

What we do is check for stocks where savvy investors in our Motley Fool CAPS community of more than 140,000 members have given them the lowest rating -- one star -- and then pair that information with various financial ratios that flash like a neon sign that the end is near.

Now that a third of those original companies have gone under or otherwise disappeared, lets take a look at some of those stocks that were deemed to be on their deathbeds.

Stock	Price at First Appearance	Price Today	% Change
Borders Group (NYSE: BGP)	$2.90	$3.14	8.3%
KB Home (NYSE: KBH)	$13.70	$18.00	31.4%
Overstock.com (Nasdaq: OSTK)	$9.94	$12.77	28.5%
P.F. Chang's China Bistro	$18.35	$32.31	76.1%
Warner Music Group	$2.98	$4.47	50.0%
Dillard's (NYSE: DDS)	$5.52	$11.55	109.2%
H&R Block (NYSE: HRB)	$20.56	$17.60	(14.4%)
Interoil (NYSE: IOC)	$15.26	$31.64	107.3%
Pinnacle Entertainment	$5.94	$10.00	68.3%
Willis Group Holdings	$26.32	$25.91	(1.6%)

Unlike previous versions of this column, where nearly all of the companies reported lower returns, this group that appeared in early November has almost all the companies actually recording positive results, some spectacularly so. Both Dillard's and Interoil, for example, doubled in price. Let's look a little more closely to see if we can ascertain why some of these companies were able to recover while others with a seemingly similar dire outlook could not.

Whistling past the graveyard
Last year when Interoil appeared on the list, there were doubts about its viability. The credit crisis, in addition to other factors, had delayed funding of its venture in Papua New Guinea, and the exploration concern was pushing out its estimates of when it expected to start exporting liquefied natural gas. Bears were having a field day as more than a quarter of its shares were sold short, but Interoil has had the last laugh. In January it shook the market with reports of finding the largest-ever reservoir of gas in Papua New Guinea; then in June both PetroChina and CNOOC (NYSE: CEO) contemplated taking a stake in the Interoil's projects there. Interoil expects to sell a 20% to 35% stake of its liquefied natural gas (LNG) project there by the end of the year. As of August 11, less than 6% of the company's shares were sold short.

With the interest China has shown in Interoil's efforts in Papua New Guinea (PNG), CAPS member pctechfool says it's time for market cap expansion:

This company has a very large natural gas field in PNG. China has large and growing needs for LNG in their region and has already shown interest in [Interoil]. [Interoil] has a small market cap compared to the resources they control.

Short sellers have also run rampant on Overstock.com, whose shares have been under constant assault by naked short-sellers -- at least if you buy into the arguments of CEO Patrick Byrne. As of August 11, just 12% of the closeout specialist's shares were sold short, still a relatively high percentage but much less than in the past.

That doesn't mean CAPS members are warming to Overstock.com any more than they have previously. The stock has consistently sported a one-star rating over the past year. Only 29% of those rating the company think it will outperform the market, while 86% of the All-Star members like mrindependent think it won't beat the market average if for no other reason than it's an unprofitable business:

Not sure why the price popped on 6/17, but I am happy to short this at the open for the same reasons other people see. The company never makes money and it has gradually sunk to a negative book value. Not much here to justify $234 million in market cap.

In the past month, Overstock.com's stock has sagged 6% possibly because of an 8% drop in sales year over year. In comparison, the stocks on the CAPS Internet & Catalog Retail tag have jumped 12% over the last 30 days.

Rattling the cage
We'll be back next week to identify more stocks that are leaving investors feeling ill. In the meantime, you can 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 your favorite stock's CAPS page. Sign up today, absolutely free, and let us know whether you think a stock is headed for its demise.