5 Deathbed Stocks

Editor’s note: A recent drop to one-star CAPS status is the primary reason for inclusion in the given table. Actions by companies could change the actual numbers in the table. Durect recently performed such an action, and the Fool regrets any confusion.

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 a stock’s 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, though, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 110,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 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.

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.

We've also added the Altman Z-Score to predict the likelihood of bankruptcy, but please note that 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; Capital IQ, a division of Standard & Poor's.

We obviously don't know where these companies are headed, so don't short them based on their appearance here. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the immediate future.

Still getting static
It's not like the FCC hasn't had enough time to consider the merits of the merger between XM and Sirius (NASDAQ:SIRI), and the regulatory body's chairman has finally -- finally! -- thrown his support behind the deal. Yet still the merger approval (or denial) drags on, and it looks like a final decision might not be reached until July. XM continues to hemorrhage; can it hang on long enough to make it through another month?

Investors like CAPS player rasputin12540 don't think the economics of satellite radio are compelling, even if a merger saves XM's hide for now:

Massive debt and no profitability in sight. Even if it does merge with Sirius, their combined debt and huge costs per new customer will ensure that they will soon default on their debt. Seems impossible to run a radio station without advertising revenue.

Not so fast, says top-rated CAPS All-Star MarkKochanowski, who thinks an FCC approval will boost the stock until the merger is finalized:

FCC is about to approve the merger of XM and Sirius. This will boost investor confidence, and in the medium run, increase the value of this stock.

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.