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 sickbay
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 give 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.

First, we'll 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 it could better use 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 succumbed?

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

Looking at the names on the list, you might be tempted to think that some of these companies might need the ICU unit at most, rather than a cemetery plot. Meritage Homes, for example, seems to generally not be in danger of implosion. It passes most of the tests, though it does fall short on the acid test.

Moreover, these quick tests can't diagnose every type of company: Financial institutions, for example, typically aren't measured by such ratios. But even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

Parade or funeral dirge?
Despite boasting a 150-year pedigree, Macy's should know from the Bear Stearns (NYSE:BSC) debacle that a long, storied history is no salve for the wounds that a fickle market can inflict. The worsening economy has taken its toll on the venerable department-store retailer, which operated 850 stores in 45 states under both the Macy's and Bloomingdale's names. Standard & Poor's has lowered the company's credit rating, and the stores consolidated several divisions earlier this year. It posted a $59 million loss in its latest quarter.

Investors are beginning to think the unthinkable. CAPS player bronzeprism thinks the only cure is an immediate installment of new management: "Macy's will not survive with the added stores of [the Hecht's chain, which Macy's acquired] and will reorganize under Chapter 11 soon, unless new management can be put in place for immediate turnaround."

In a stinging rebuke, CAPS All-Star Gonzhouse likens Macy's to a Sears Holdings (NASDAQ:SHLD) store without all the pizzazz: "This is Sears without Craftsman. Retail is going to be dominated by specialty." Ouch.

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.