5 Deathbed Stocks

We've all heard of the "death rattle," the last gasp from an ailing soul. Sometimes, we can almost hear it from the companies we invest in. 

Revenues dry 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. Sure it happens, but here we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 97,000-strong Motley Fool CAPS community, where players give a thumbs-up or thumbs-down to more than 5,600 stocks. The first year of collecting 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 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 it's able to meet its short-term operating needs. But watch out! Too high a value might mean the company is hoarding assets that could be better used elsewhere.

Here's today's list. The question is, are these companies 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 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 are possibly destined to seriously underperform the market in the future.

A segue into failure
It's hard to believe that a company that has never once posted a profit in over 18 years has managed to stay in business. Yet there is Valence Technology, a manufacturer of phosphate-based lithium-ion batteries, still going strong and actually enjoying a stock that tripled in value over the last year. Well, "strong" might be too strong a word, and its stock is actually well off its 52-week highs.

Investors would also do well to note that despite making the batteries for the Segway personal transporter, it has only $2.8 million in cash, its source of liquidity are insufficient to last the year, and while the company says it expects to continue as a going concern -- considering its history they may just be right -- it also acknowledges that it may not be able to do so, particularly if it's unable to arrange debt or equity financing.

Investors are, in fact, heeding the warning signs. Top-rated CAPS All-Star QuickBen notes the divergence between earnings and revenues and Valence's valuation and he sees a good reason for a short position.

So they don't actually earn any money but have a half a billion in market capital. But ignoring earnings, at the rate they are growing they possibly could achieve a reasonable P/S similar their industry peers... Lets see... no wait... they would have to x20 their revenue. Add in 50 million in rapidly growing debt that they have no hope of paying off without diluting and I think it may be time to join the growing short position in this company.

Speaking of divergence, a number of CAPS investors have noted that overall, Valence is expected to outperform the market by some 55% of those who have rated the stock, and nearly three-quarters of all All-Star investors rate it an underperform.

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.