5 Deathbed Stocks

We've all heard of the "death rattle," the dying sounds emanating from a lost soul's lungs as the end approaches. Think of the sound Velcro fasteners make as they're pulled apart.

Sometimes, it seems as though the companies we invest in are giving off signs of their own that the end is near. Revenues dry up. Margins contract. Profits evaporate. It's a visual cue that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bay
Not all companies that plunge into the abyss will die. Some will linger in a nether state, while others bounce back to live another day. Kmart climbed from the coffin of bankruptcy to become part of Sears Holdings (NASDAQ:SHLD). Similarly, UAL (NASDAQ:UAUA), the parent of United Airlines, recrossed the River Styx to fly the friendly skies once more.

Yet what we're seeking here are companies whose breathing is so labored that, for all intents and purposes, they've given up the ghost. To do that, we turn to the 76,000-strong investor intelligence community of Motley Fool CAPS.

Checking out the morgue
This investing platform rates stocks and investors and assigns a rating to each: Stocks get one to five stars (five is best), and players get numerical scores up to 100. With a year's worth of data to test, the morticians digging through the information have found that stocks with the highest ratings did best, while those with the lowest fared worst. Yes, I know -- "Duh!" But we can begin to use this data to our advantage.

Below are a handful of stocks that are on the way down. These have recently moved from a low two-star rating down to the worst one-star rating. Are they suffering from a bad case of the flu, or is it the death rattle we hear?

Looking at the names on the list, you might be tempted to think that some might need the ICU unit rather than a cemetery plot. Bear Stearns, for example, might be considered too big to fail, while China Finance has posted some eye-popping returns this past year. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

Selling China short
Despite its huge run-up, China Finance Online may be waiting to head down. The company markets subscription-based online financial analysis services and data about Chinese equities. It recently forecast that 2008 revenues will grow to as much as $60 million, nearly 20% higher than previous guidance. Yet while investing in Chinese stocks might be considered something of a bubble here, it's become something of a mania in China -- one that the government is trying to dampen. Depending on how that works out, the air could be let out of this rapidly rising balloon too quickly, and its shares could plummet.

CAPS All-Star KatWoman50, with a 97.79 player rating, is incredulous that China Finance's business model supports such a stratospheric valuation: "Sells chinese stock newsletters through telemarketing. P/E 466. This is a bubble stock if I've ever seen one."

Another All-Star, SmokeyJoeSmokin, shares that view and likens the interest here to the tech bubble of the '90s:

This company is ridiculously overvalued! ... There are some good values in Chinese stocks (only a few though....), but this isn't one of them. See you in the single digits.

Yet is its high valuation fatal? What investors need to consider is whether China Finance Online could survive not only a crash in its share price, but a market crash as well if things turn south or the government itself steps in to throw cold water on the party.

Rattling the cage
So are these companies doomed? Should we pay them our last respects? Will they go on to a period of time in pain and penury -- along with their investors? 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 -- it's completely free! -- and let us know whether you think the Grim Reaper is just outside the door.