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. 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
Don't assume that all such companies are goners. Some will barely cling to life, while others will 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 140,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed six feet under based on their one-star ratings, but we'll head over to CAPS to measure the opinions there.

Then we'll palpate the stocks' pulses with some quick tests for liquidity -- 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 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 waiting.

Here’s today's list. The question is: With our primary screen being those stocks that CAPS investors have given one-star status to ... are these companies only mostly dead, or have they already given up the ghost?

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

We obviously don't know whether these companies are headed six feet under, 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. Let's use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market.

Whistling past the graveyard
Nanometrics might not be ready to sing "swing low, sweet chariot" just yet, but it's going to have to do more than post a single quarter of growing sales to impress the investors on CAPS, who are nearly evenly divided over its prospects. And when one looks solely at the All-Star members rating it (75% think it will underperform the market), there's a decided bearish position.

Nanometrics' stock soared in recent weeks as after it posted a third-quarter profit and confounded analyst expectations. The supplier of advanced process control metrology systems said sales surged 12% and expenses plunged from the previous period as it received multisystem orders from customers. As it exciting as the jump might have been, even management says not to expect a repeat in the near future.

Top-rated CAPS All-Star UltraLong thought Nanometrics' performance was good, but also noted management's caveats on future growth:

Underperform recommendation from what I would refer to as a rampant overvaluation at these levels. Nanometrics has never shown any real consistency in turning a profit and they even STATED in their quarterly report that their revenue growth would begin slowing. If you didn't notice, 15% revenue growth isn't exactly blowing the door off the barn. Despite a relatively low 19M in debt, thats quite a hefty load for a company like this and could pose a credit risk going forward. Although like Vanamonde said, this could have long-term potential, this is a venemous snake waiting to suck your money in the short-term.

Nanometrics competes against the likes of KLA-Tencor (NASDAQ:KLAC) and Rudolph Technologies (NASDAQ:RTEC), both of which were also able to handily beat analyst forecasts as the semiconductor industry rolled higher. Nanometrics will need to perform at this level consistently if it wants to warrant investor confidence.

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.