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 a company's 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 make a full recovery. Kmart climbed from the coffin of bankruptcy to become part of Sears Holdings, while United Airlines parent UAL recrossed the River Styx to fly the friendly skies once more. But in this column, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 83,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,300 stocks. A year's worth of data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks headed six feet under, having recently dropped from two stars to the lowest one-star rating. Are they only mostly dead, or have they truly given up the ghost?

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. Biopharmaceutical Acorda Therapeutics, for example, is actually showing decent, positive returns, although much of that occurred just this week on positive clinical trial results. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future, and although it has seen good test results thus far, Acorda's multiple sclerosis drug Fampridine-SR still has a ways to go before it can be marketed.

Host and graft, not foot-in-mouth
Another "therapeutic" company has seen its shares do the exact opposite of Acorda's, falling more than 50% for the past year. Osiris Therapeutics, although it's one of the leading stem-cell companies around, is operating in an industry lost in a regulatory fog at the moment. It has been burning through cash as it puts Prochymal through clinical tests for treating acute host vs. graft disease, a complication that arises from bone marrow transplants. Losses continue to mount in the meantime.

There may be some rays of hope for Osiris. One is the contract it just won from the Department of Defense to stockpile Prochymal, valued at $224 million, as well as the $500,000 payment it received from JCP Pharmaceuticals to begin clinical tests in Japan. Osiris will be partnering with Genzyme (Nasdaq: GENZ) on the government contract.

Those who see Osiris on its deathbed include CAPS investors like NeroSagetrade, who found its valuation extreme and the potential for failure great in this pitch from last month:

Their mid-phase trials have been less than bullish suggesting little to moderate success of their inflammatory drug used after knee surgery. They are trading at 30 times sales and get those tissues ready because you'll be crying from laughing so hard, 2131 times book value!!! ... [T]he company is quickly running out of cash. With 22M left in the bank and a burn rate of practically 3.5M a month i'll leave you to do the math!

On the other side are investors like razormd, who found the research compelling and the potential for success meriting further consideration in this pitch from last August:

Interesting technology supported by worthy research ... upcoming phase III trial results will reveal more ... merits a few speculative dollars at this point.

Stem-cell research holds the promise of curing many of the diseases which ail us. The question is whether Osiris will be around to lead the way -- and who will end up taking their foot from their mouth at the end.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? 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, absolutely free, and let us know whether you think the Grim Reaper's at the door.