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 we invest in. Revenues dry up. Margins contract. Profits evaporate. All of these signs suggest that their 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 just about given up the ghost.
For help, we'll turn to the clever coroners at our 85,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,400 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 that look as though they might be headed six feet under, having recently dropped from two stars to the lowest one-star rating.
We'll also check out some quick tests for liquidity -- the current and quick ratios (also called the "acid test") -- which will give us an idea of a company's ability to pay its bills. A current ratio above 1.5 and a quick ratio north of 1.0 mean the company is able to meet its short-term operating needs. But watch out! Too much might mean the company is hoarding assets that could affect long-term results.
So are these companies only mostly dead, or have they truly given up the ghost?
|
Stock |
Recent Stock Price |
1-Year Return |
Current Ratio |
Acid-Test Ratio |
|---|---|---|---|---|
|
Molina Healthcare |
$33.72 |
8.22% |
1.9 |
1.9 |
|
Abiomed |
$14.90 |
6.58% |
4.6 |
3.6 |
|
Churchill Downs |
$46.24 |
6.35% |
0.9 |
0.5 |
|
Dot Hill Systems |
$3.66 |
5.48% |
3.6 |
3.4 |
|
Unitil |
$26.93 |
5.11% |
1.1 |
1.0 |
Looking at the names on the list, you might be tempted to think that some of these might need the ICU unit at most, rather than a cemetery plot. Managed-care provider Molina, for example, just reported a 54% increase in profits, as it gained new members and experienced lower medical costs. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.
Headed for the glue factory?
Few racetracks in the country have as much of a storied history as does Churchill Downs, home of the Kentucky Derby. From War Admiral in the 1930s to Whirlaway in the '40s, and from Secretariat, Affirmed, and Seattle Slew in the '70's to Barbaro in 2006, Churchill Downs has been the scene of some of the most dramatic horse races in history.
Yet Churchill Downs the company is more than just a single racetrack or a memorable race, no matter how colorful its past. (The Derby has been run continuously since 1875.) Its far-flung operations include tracks across the country, off-track betting facilities, an interest in a telecommunications provider for the pari-mutuel and simulcasting industries, and a joint venture with troubled track operator Magna Entertainment
These varied interests have served to steadily increase trailing revenues, but profits have steadily declined. It seems thoroughbred racing is a dying sport. According to the National Thoroughbred Racing Association, the number of races run has declined for at least three years in a row. It has taken a mix of off-track betting offices, simulcasting races from other tracks, and the addition of slot machines to keep the tracks going. A look at Churchill Downs' balance sheet makes it seem as though it won't make it to the home stretch.
Top-rated CAPS All-Star splashmonkey, with a 91.06 player rating, finds the company's dwindling margins a sign of things to come: "Margins are small as it is. They will shrink as purse strings around the country tighten."
Churchill Downs just won the right to inter the ashes of track legend Barbaro and will have a bronze statue erected outside its main gate. It remains to be seen whether the ashes of the track itself will end up being buried alongside.
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.
