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.  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 sick bay
Don't assume that all such companies are goners. Some will barely cling to life, while others make a full recovery. Here, however, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 95,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 stocks. Our first year of data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. Today, we've unearthed a handful of stocks that look like 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 ratio and quick ratio (also called the "acid-test" ratio) -- which gives 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 means the company's able to meet its short-term operating needs. But watch out! Too high a value might mean that the company is hoarding assets that could be better used elsewhere.

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

From the names on the list, you might be tempted to think that some of these might need the ICU at most, rather than a cemetery plot. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions, for example, don't get measured by such ratios. Even so, stocks that CAPS investors have marked down to one star may be destined for serious underperformance.

Just one word ...
Plastics might have been the watchword of the '60s, but in today's eco-aware society, their dependence on fossil fuels for development, and their lengthy persistence in our landfills, makes many people feel they're a suboptimal choice for the future. Enter Metabolix, which seeks to develop biodegradable plastic from corn syrup, in a joint venture with Archer-Daniels-Midland (NYSE: ADM). It's a story stock that appeals to many investors' green sensibilities, but with a resin that's more expensive than traditional plastic, and construction delays at its manufacturing facility, analysts aren't expecting it to turn out anything until at least next year.

Yet Metabolix has frustrated the short-sellers before, and it's even successfully defended its patents against Procter & Gamble (NYSE: PG). Two-thirds of the CAPS investors who've rated it think Metabolix will outperform the market, assuming it survives. But some top-rated players, like All-Star tuffsledding, with a 99.94 player rating, see it as an "Overhyped story stock. Short ..."

Player ramalanadingdong agrees in this pitch from last fall, arguing that others in the industry are doing it better and more cheaply. Here's an excerpt:

There are several other companies who are doing bioplastics better and cheaper with resin available now. Biodegradable plastics do NOT degrade in landfills. They are NOT recyclable ... It makes much more sense for industry to improve recycling. And as far as a plant source versus oil for feedstock: [there] are companies now making traditional plastics (like polyethylene) from plant sources. And these plastics CAN be recycled.

With Metabolix's losses narrower than analyst expectations last quarter, this could be one of those stories that has a happy ending. The question is, though, how many people will be willing to pay more for its Mirel biodegradable plastic, which is being marketed as a "feel good" product?

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.