5 Deathbed Stocks?

Sometimes we seem to hear a gasping from the companies in which we invest. Revenue dries up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sickbay
But don’t assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Here we’re seeking 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 some 5,400 stocks. Data shows that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared the worst. We’ve unearthed a handful of stocks that look like they might be headed six feet under based on their having garnered the lowest one-star rating.

Looking among those, we’ll take their pulses with some quick tests for liquidity -- the current ratio and quick ratio (also called the “acid test” ratio) will give us an idea of a company’s ability to pay its bills, and we'll use the Altman Z-Score to suss out companies in potential 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. The cryptkeeper is waiting for those with scores below 1.80.

Here’s today’s list. Are these companies only mostly dead, or have they already given up the ghost?

Stock	Current Ratio	Acid-Test Ratio	Altman Z-Score	Recent Price
Borders Group (NYSE: BGP)	1.0	0.1	2.20	$2.90
KB Homes (NYSE: KBH)	2.4	0.7	2.36	$13.70
Overstock.com (Nasdaq: OSTK)	1.4	1.0	4.41	$9.94
P.F. Chang's China Bistro (Nasdaq: PFCB)	0.6	0.2	3.45	$18.35
Warner Music Group (NYSE: WMG)	0.6	0.4	0.66	$2.98

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

We obviously don’t know whether these companies are headed for Flatline City, so don’t short them based solely on their appearance here. Moreover, some companies, like software makers and financials, don’t neatly fit into the Altman Z-Score scale. Still, our primary screen searches for stocks that CAPS investors have marked down to one-star status, making these companies possibly destined to seriously underperform the market.

Overstock under-reporting
Even with its high Altman-Z score, online closeout retailer Overstock.com seems to have a screw loose. Make that a wire. CEO Patrick Byrne said that because he forgot to hook up some "accounting wiring," the company neglected to properly report customer refunds and credits. Oops! Now Overstock will be restating its financials all the way back to 2003. Unlike online retailer Amazon.com (Nasdaq: AMZN), CAPS member ajsiegel wondered how Overstock has remained in business, expressing concern over the accounting before the latest revelations:

How is it that a company who has never turned a profit is still around. Competition is better and there is something very odd about their accounting practices of recognizing revenues up to last year.

Borders is no page-turner
Even before the market collapsed, Borders Group was predicting it would have a bad year, and seeking out "strategic alternatives." Even Barnes & Noble (NYSE: BKS), which is measurably more financially secure -- in that it is both profitable and virtually debt-free -- anticipates a horrid holiday season. It's no mystery, then, that a more financially fragile company like Borders is looking a bit musty.

Back in July, CAPS All-Star member AresFinancial listed 11 reasons why Borders is a "bankruptcy icon." You can read the entire pitch on Borders' CAPS page, but here's an excerpt:

Borders like many retailers is an eventual Bankruptcy Icon. Built during the boom of a "borrow and spend" US economy, it will collapse under a the credit contraction as consumers retrench.

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.