5 Deathbed Stocks

We've all heard of the "death rattle." 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
Some of these stocks will make a full recovery; others will barely cling to life. Today we're looking for companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 120,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,400 stocks. Data show that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fare the worst. We've unearthed a handful of stocks that look like they might be headed six feet under based on their having garnered no more than the lowest one-star rating.

We'll check their pulse with some quick tests for liquidity. 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. 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 cryptkeeper is rubbing his bony hands.

We obviously don't know if these companies are headed for a pine box, so don't short them based on their appearance below. Moreover, some companies don't neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have marked down to one-star status, meaning they are possibly destined to seriously underperform the market.

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

D.R. Horton (NYSE: DHI  )

6.3

0.7

2.56

Equinix (Nasdaq: EQIX  )

1.2

1.2

1.16

General Motors (NYSE: GM  )

0.7

0.4

0.29

Hoku Scientific (Nasdaq: HOKU  )

1.4

0.7

2.20

salesforce.com (NYSE: CRM  )

1.3

1.2

7.08

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

General Motors
Reading the news these days, it seems as if it's only a question of when -- not if -- GM will finally kick the bucket. It's reportedly mulling the possibility of buying Chrysler, although how it might finance such a deal is questionable since it drew down every last bit of credit it had. And a merger with Ford (NYSE: F  ) always hovers in the background. No longer does the once-top car maker need to consider whether it can keep the title away from Toyota (NYSE: TM  ) , it's in a serious bind just keeping the name "car maker."

CAPS member eagles22, who has rated GM an outperform, acknowledges the challenges to staying solvent, but says loosening credit markets may invite more auto loans and that grim conditions may force significant concessions from the unions:

If it stays in business, this will show a nice long term return. We're looking at excellent potential returns from a deep value standpoint. Of couse, staying in business is a big if. Thawing out the credit markets will help - car loans will start up again. In addition, downturns have traditionally shown the highest rate of innovation in auto companies. Perhaps dire straights is what [General Motors] needs to make progress with their unions, push new and cutting edge models, and reinvent the idea of the American automaker. We'll see.

Hoku Scientific
Top-rated CAPS All-Star TheGarcipian thinks he may need a little more practice at writing haikus for Hoku, but he feels there's no rhyme or reason why it should do any better at making polysilicon for the solar industry than it did making fuel cells for the automotive industry:

Polysilicon
Fuel cell membrane, not so tame
Could it be the one?

Ok, it's clear: I suck at writing haikus. But I think that's likely the only good thing to come out of this company. With a market cap of $117M but only $4.3M in sales, I'm with [CAPS player] TMFBent when he says these guys "are going to tank" due to falling silicon prices and their shifting priorities (once engaged as "an alleged game-changer in fuel cells", notes [TMFBent], but now involved in polysilicon production.

You can read the full pitch -- but no additional haikus -- at Hoku Scientific's CAPS page.

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.

Try any of our Foolish newsletters today, free for 30 days. The Fool is alive and kicking and raring to go, even in this market. 

Fool contributor Rich Duprey does not have a financial interest in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool's disclosure policy is full of life.


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  • Report this Comment On October 22, 2008, at 4:38 PM, johnfstephjr wrote:

    Regarding GM: More FOOLISH thinking from the damn Communists. Only FOOLS listen to fools!!!

  • Report this Comment On October 23, 2008, at 9:44 AM, Hortonsucks wrote:

    It looks like Horton will be the first of the giant homebuilders to go under. This will be good in the long run, as we need to "thin the herd" anyway. Horton CEO's are still raking in million$$ while thousands of Joe the Construction Guys get canned? Good Riddance to these loutish creeps!

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