5 Deathbed Stocks

Editor's note: In an earlier version of this article, Belo was mistakenly included in a list of newspaper companies. The company is no longer in the newspaper business. The Fool regrets the error.

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we 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 100,000-plus-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,600 stocks. The first year of collecting data suggests that CAPS' highest-rated, five-star 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 rating -- one star.

We'll also check out some quick tests for liquidity -- the current ratio and the 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 generally 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.

We've also added the Altman Z-Score. In the 1960s, Edward Altman used statistical techniques on five financial ratios to predict the likelihood of bankruptcy, based on those ratios alone. The New York State Society of CPAs has said the Z-Scores are the "tried-and-tested formula for bankruptcy prediction," but please note: It's not designed to be used in every situation, and there are some limitations to it.

A company scoring 3.00 and above is considered safe; scores between 2.70 and 2.99 are in the "yellow flag" zone; scores between 1.80 and 2.70 mean the chance of going bankrupt within two years is good; and scores below 1.80 mean "Watch out below!"

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 of these might need the intensive-care unit at most, rather than a cemetery plot. Ann Taylor, for example, seems to generally not be in danger of implosion, and a recent upgrade in profit guidance suggests things are turning around. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions typically 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.

Read all about it!
It's no surprise to find print media companies on lists of troubled stocks. Even the venerable Gray Lady, The New York Times (NYSE: NYT), has found itself needing to trim its masthead. Shrinking ad revenues have been sinking McClatchy (NYSE: MNI) and GateHouse Media. The latter reported that comparable sales fell 4.2% in the latest quarter because of weaker classified ad spending.

Of course, the broad reach of GateHouse Media's publications -- more than 500 community publications going to 10 million people a week -- has some CAPS investors like geeemann believing it will come through.

Printing daily 87 newspapers to nearly one million subscribers, plus [supplementing] with 248 weekly newspapers some published three times per week to nearly three quarter of a million homes ... with add only trade publications over 2.5 million. Need I say more ... a bargain at these prices!

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.