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 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. But we're seeking companies that have virtually given up the ghost.

For help, we'll turn to the clever coroners at our 105,000-strong Motley Fool CAPS community, where players have given the 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 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 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.

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 already given up the ghost?

Sources: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's. Z-Scores courtesy of GrahamInvestor.com.

Looking at 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. Herley Industries, for example, appears to generally not be in danger of implosion -- it seemingly has handily passed the tests. 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 in the future.

Up, up, and away?
When it comes to investing in the airline industry, the discussion can't get very far without looking at the havoc that rising fuel prices are playing on its viability, as top-rated CAPS All-Star ddberg notes:

I used to think very highly of AirTran, as it's one of the best-run airlines in the nation. But this is an industry that was drowning even when oil prices were at $70 a barrel, so unless oil prices absolutely plummet sometime in the very near future (probability: roughly 0%), someone needs to explain to me how any airline -- big, small or otherwise -- is going to consistently make money. The only airline stocks that are going to be in the black 1-2 years from now are those that are acquired.

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.