5 Deathbed Stocks?

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we also seem to hear it from the companies in which we invest. Revenues dry up. Margins contract. Profits evaporate. All of 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. But we're seeking companies that have virtually given up the ghost.

For help, we'll turn to the clever coroners at our 135,000-strong Motley Fool CAPS community, where members give their thumbs-up or thumbs-down to some 5,300 stocks. We've unearthed a handful of stocks that look as though they might be headed six feet under, based on their lowly one-star ratings, but we'll head over to CAPS to get an accurate measurement of our members' opinions. Then we'll check the pulse of the companies in question with some quick tests for liquidity. And who knows -- maybe we'll still find some signs of life!

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, and the Altman Z-Score identifies companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, while those scoring between 2.70 and 2.99 are "yellow flags." Companies falling 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 waiting.

Here's today's list.

Stock

CAPS Rating (Out of 5)

Current Ratio

Acid-Test Ratio

Altman Z-Score

Recent Price

AMERCO (NYSE: UHAL  )

*

2.2

1.3

1.30

$37.50

American Axle & Manufacturing (NYSE: AXL  )

*

1.1

0.7

0.29

$3.56

Diedrich Coffee (Nasdaq: DDRX  )

*

1.2

0.7

1.02

$23.49

Photronics (Nasdaq: PLAB  )

*

1.3

1.1

0.79

$4.03

Unica (Nasdaq: UNCA  )

*

1.4

1.4

2.05

$5.54

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

We obviously don't know for certain whether these companies are headed for the graveyard, 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
Since Diedrich Coffee's success is directly tied to the fortunes of Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , questions about the viability of one company will undoubtedly reflect upon the viability of the other.

Yet does the speculation in Diedrich's stock amount to a hill of (coffee) beans? Diedrich has gone from literally being a penny stock as late as this past March to almost $21 a share today, enough to send its market valuation soaring from $2 million to more than $120 million.

But I have jitters about Diedrich over the longer term. It sold its Gloria Jean's coffee shops to focus more on producing K-Cups for Green Mountain, and it's expanding production to increase K-Cup output capacity by more than 40%. While Green Mountain is teaming up with Mr. Coffee to sell a line of coffee makers under the Mr. Coffee name and will be selling its Keurig machines in Wal-Mart Stores (NYSE: WMT  ) , any misstep by the Vermont-based brewer could have a dramatic impact on Diedrich's performance.

Investors seemed to have jumped on the coffee craze and pushed coffee stocks higher, but one of the most highly rated members in CAPS just doesn't understand the buzz. UltraLong says that the surge in Diedrich's stock is just a prelude to its being run back down. Here's an excerpt:

This is goofier than Disney and so is the run-up! Show me consistent growth history, more cash on hand, and a closing of that gap and I might consider this for the future. For now, assume coffee won't run up 100% every 30 days and this won't run up 8000% in 3 months without a major pullback.

Although the numbers in our table suggest that Diedrich is possibly in trouble, recent developments with Green Mountain -- if both companies can execute on them -- make that outcome appear less likely. However, given its enormous share-price increase, super-high expectations are baked into the price. So I agree with the CAPS rating of Diedrich as a one-star company that's likely to underperform the S&P 500 from here.

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.

Green Mountain Coffee Roasters is a Motley Fool Rule Breakers selection. Wal-Mart Stores is an Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart but has no financial interest in any other stocks mentioned in this article. You can see his holdings. The Motley Fool's disclosure policy remains vibrant and full of life.


Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2009, at 10:35 AM, remysfc wrote:

    Just wondering why you emphasized the current, quick and acid tests, if you weren't going to give better examples??? How about Walmart mentioned in the article which has a current under .9. What about EQR and their real problems. A company with an acid test under 1.5 is not necessarily in danger but actually average. I thought this article would make some sense, but you could have made about 500 other companies that were in loads more trouble then these. At least explain to us why you didn't mention Walmar (smack in the middle of your article), and please don't say it's because of the value of their assets or BV. That point is moot since they are in a constant state of time deterioration.

    Thanks,

    Remysfc

  • Report this Comment On July 01, 2009, at 4:46 AM, hongchang wrote:

    oh well, you were wrong on day 1! You logical is the same as when a stock is down from 100 to 5 and it's cheap to buy. Very flawed analysis.

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