3 Stocks on Deathwatch

A financial crisis like this one may hurt right now, but it comes with a couple of positive sides.

Since I'm a heartless opportunist, I cherish the thought of bad businesses going bankrupt. It means that the capitalist system is working. The survivors have less competition, and the corpses are great reminders of what not to do in the future. In short, what doesn't kill you will make you stronger. That goes for you, for your portfolio, and for the companies in it.

The usual suspects
There's a handful of companies that I fully expect to follow Circuit City (NYSE: CC  ) , Linens 'n Things, and Tweeter into the abyss of Chapter 11 bankruptcy protection or even Chapter 7 liquidation. And yes, I'm pointing a finger at weak retailers. Shaky balance sheets can fall apart after just one weak holiday season -- just look at KB Toys and Montgomery Ward.

Check out these giants on shaky legs:

 

1-Year Trailing Sales Growth

Net Margin

Quick Ratio

Pier 1 Imports (NYSE: PIR  )

(8.6%)

(4.1%)

0.70

RadioShack (NYSE: RSH  )

(0.4%)

5.3%

   1.6

KB Home (NYSE: KBH  )

(43.1%)

(34.4%)

   N/A

Unsurprisingly, all three of these stocks get the lowest possible rating (one star out of five) from our Motley Fool CAPS community. These guys are repeat offenders in my "Stocks That Missed the Mark" series, and each time they disappoint the Street, I can't help but wonder how much longer they'll survive.

On the dock of the bay
How many times has Pier 1 announced some great turnaround plan, only to complain about empty stores and weak demand in the next report? Don't answer that. It's a trick question. "Plenty" is good enough for me.

Admittedly, this company is up against some of the toughest competition anywhere. Squeezed between remorseless home goods specialist Bed Bath & Beyond (Nasdaq: BBBY  ) on one side, big-box juggernauts like Target (NYSE: TGT  ) on another, and department stores fighting for their own lives on the third, I simply find it amazing that Pier 1 has survived this far.

But Linens 'n Things is the dead canary that shows which way this wicked wicker vendor is going. Sales are slowing rather than growing, the company has turned in just one profitable quarter out of the last 14. Pier 1 sold and leased back its headquarters in June to get some operating capital. This is not a healthy puppy.

The rest
Out of my three suspects, RadioShack probably has the greatest chance of survival. The electronics retailer has a decent amount of cash on hand and is still profitable. But its strip-mall niche looks like it's going extinct in favor of leaner, meaner big-box boys like Target and Best Buy (NYSE: BBY  ) . And perhaps a name change is in order -- good old radios haven't been cool since the last decade.

Finally, KB Home is here to scare some sense into you. I could have picked any of about a dozen homebuilders with equally scary prospects. This one never built up a real cash reserve when times were good, but injected nearly every penny earned into more land and more construction. That is not how you get through the lean years that follow. KB's EBITDA margin is now negative thanks to deep discounts, so selling more homes wouldn't even help.

On the bright side of the homebuilder story, a few of them simply have to survive this crash and come out stronger on the other side. Feel free to ferret them out, but I don't think that KB is one of them.

The bottom line
When businesses do fold, it makes their competitors stronger and clears the way for new growth. Death is part of the circle of life and I'd be very surprised if any of these three wobbly structures are still standing in 2010.

Further Foolishness:

Best Buy and Bed Bath & Beyond are Motley Fool Inside Value picks. They are also Motley Fool Stock Advisor selections. The Fool owns shares of both companies. Want to know what the heck is going on with your money? Try any of our Foolish newsletters today, free for 30 days, and see how we can help you help yourself.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, although he does shop at Target and Best Buy on occasion. You can check out Anders' holdings or a bio if you like. The Motley Fool is investors writing for investors.


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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 December 16, 2008, at 9:24 PM, Jognils wrote:

    I couldn't agree more. In fact, I've been sitting on underperform CAPS picks on CC, PIR, and KBH for close to a year now. Fail, baby, fail!

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