Deathbed Stocks Revisited

Over the past eight months, we've been chronicling stocks that seem to be on their last legs. These companies' revenues are drying up, their profits are evaporating, and various financial ratios are flashing like a neon sign that the end is near. So some savvy investors in our Motley Fool CAPS community of more than 115,000 members have given them the lowest rating -- one star.

Over the past 18 months, CAPS data show that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared worst. The tales of woe left by the companies that have appeared in this column underscores that data.

A case of triskaidekaphobia
While 15 companies appeared in the first three Deathbed Stocks columns, two no longer exist as independent entities. Bear Stearns was salvaged by JPMorgan Chase (NYSE: JPM  ) , and XM Satellite Radio was revived when the Federal Communications Commission finally granted approval for its merger into what is now Sirius XM Radio (Nasdaq: SIRI  ) . The other unlucky 13 companies have gone on to lose an average of more than 34% of their value.

Stock

Price at First Appearance

Price Today

% Chg

A.C. Moore

$15.85

$7.89

(50.2%)

Capstone Turbine (Nasdaq: CPST  )

$1.69

$2.73

61.5%

China Finance Online

$25.69

$15.84

(38.3%)

Corus Bancshares

$11.20

$4.75

(57.6%)

Fannie Mae (NYSE: FNM  )

$37.46

$8.02

(78.6%)

Lehman Brothers (NYSE: LEH  )

$62.19

$16.21

(73.9%)

Medifast

$4.95

$6.46

30.5%

Merrill Lynch (NYSE: MER  )

$53.20

$24.88

(53.2%)

Nortel Networks (NYSE: NT  )

$15.38

$5.94

(61.4%)

Playboy Enterprises

$8.89

$4.41

(50.4%)

Sallie Mae

$19.36

$16.22

(16.2%)

Transmeta

$13.86

$15.38

11.0%

Washington Mutual

$13.54

$4.30

(68.2%)

Stocks in sickbay
As you can see, not all of these stocks have given up the ghost; some are even up. That's why we always point out that you shouldn't assume all the companies we highlight are goners. These lists are merely a starting point for you to conduct further research on their prospects.

While the sagas behind Bear Stearns and XM are well-known, how is it that a small cap like Capstone Turbine was able to power its way to stunning returns, while Nortel Networks dropped by nearly the same percentage?

Capstone makes small energy plants, powered by multiple sources of fuel, that can be used on individual buildings to provide some or all of their energy needs. Despite another quarterly loss, which might lead some observers to suggest that the company is in a weak position, Capstone's loss narrowed slightly year over year, while revenue rose 34% in the same period. A growing backlog of business also points to a steady flow of customers.

The prospects, plus a well-placed slip of the tongue by Capstone's CEO, had CAPS member -- well, me -- suggesting that there could be a serious ramp-up in sales.

Capstone CEO Darren Jamison apparently let slip that the company could easily do $50 million in revenues this year with profitability by 2012 a "reasonable date." While the microturbine maker's lawyers undoubtedly pulled their hair out upon reading the Bloomberg article, they quickly put out a release saying the company doesn't publicly disclose internal financial projections. That's closing the barn door after the horse has escaped.

$50 million in sales this fiscal year equates to a 60% growth rate over fiscal 2007. As CPST achieved a 49% growth rate last year, this suggests sales are ramping up fairly significantly though whether microturbines will achieve enough placement to warrant Jamison's profitability forecast remains to be seen.

Contrast that with Nortel Networks, whose losses spiked in the most recent quarter. Orders fell because of less CDMA (code division multiple access) spending by customers, one of which was rumored to be Sprint Nextel. That has caused CAPS member tcvegas to compare the networking solutions provider to a disabled turtle racing against much faster competition.

[CEO Mike] Zafiroski can't cut much more cost out; revenue has stalled for years, now headed dramatically south with the hastened demise of CDMA investment by the wireless bunch.

Nortel's market share has fallen to 3rd or lower in most markets it plays in. It's like trying to race a cheetah (Cisco) when all you've got is a turtle with two broken legs ... very sad. Reality is [Cisco] just had Q4 revenue almost equal to Nortel's full year revenue ... how the once mighty Canadian player has fallen.

Rattling the cage
We'll be back to identify more stocks that are leaving investors feeling ill. In the meantime, 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 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.

Sprint Nextel is a Motley Fool Inside Value recommendation, JPMorgan Chase is an Income Investor pick, and Playboy is a Rule Breakers selection. Try any of our Foolish newsletters today, free for 30 days.

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


Read/Post Comments (3) | Recommend This Article (9)

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 August 13, 2008, at 1:27 PM, ipdrive wrote:

    It is amazing how people can be so misinformed about a company.

    The author wrote: "Capstone makes microturbines, small wind-power energy plants"

    A microturbine is not a micro wind turbine. It is a micro-jet engine, as in fueled by combustible materials.

    It would be pretty funny to see a bunch of small wind turbines in the basement of a building doing nothing.

  • Report this Comment On August 13, 2008, at 2:55 PM, RevPork wrote:

    I Thought Capstone Turbine Made Balloon Animals??? may I suggest Duprey never speak a word of CPST again... Or at least you should pay someone to do your homework for you..

    keep up the good job!!! while you still have one...

  • Report this Comment On August 13, 2008, at 3:25 PM, TMFCop wrote:

    Thanks folks, digs well-deserved. I've correctly identified in the past that their turbines are powered by various forms of fuel, but I guess the fingers were flying too fast today and I said they were wind-powered. A correction will be going up soon.

    Thanks for holding my feet to the fire!

    Rich

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