5 Deathbed Stocks

Editors' note: In an earlier version of this story, Chesapeake Energy was mistakenly included in the table instead of Chesapeake Corp. The Fool regrets the error..

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 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. Here, 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 a company is 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 -- 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 if these companies are headed six feet under, 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.

Fly me to the moon
I'm guessing no one is surprised that three airline stocks are on the list of companies possibly pushing up daisies soon. Yet as oil prices have pulled back for three straight sessions and the airlines themselves have initiated a series of maneuvers to cut back capacity, the industry in general has staged a rally of sorts, with the 14-stock Amex Airline Index (AMEX:XAL) rising 33% off the all-time lows achieved earlier in the week.

Equally helpful has been Continental Airlines' lower-than-anticipated loss. The airline benefited not only from increased international travel to Latin America, where the dollar has fared better than against the euro, but also from adding a second-checked-bag charge for some customers and several fuel surcharges and fare increases.

Investors like CAPS member iGetMoney8 sees Continental ultimately recovering because of its ability to pass on costs -- not to mention impose new ones -- on passengers. Besides, the industry has been through worse:

The airline industry is in a very unique position. With the price of oil (gas) escalating, people in the U.S. would rather fly than drive on their vacations. The airline may be paying more for oil, but that cost will ultimately be passed along to the passengers. This industry has been able to evolve with the times, and these times will prove to be no different. If the airlines could survive 911, surely they can survive a rise in oil prices.

No refunds or exchanges
Perhaps more surprising for its inclusion on the list is NYSE Euronext, which runs the New York Stock Exchange (as well as five additional cash equities exchanges in five countries, plus six derivatives exchanges). While the Motley Fool Rule Breakers recommendation makes money on both sides of a trade, even in declining markets, it seems doubtful that it will go under. Further, with its purchase of the Doha Securities Market in Qatar for $250 million, NYSE Euronext looks pretty healthy. It appears to remain a worthy competitor to the Nasdaq (NASDAQ:NDAQ).

Even CAPS members like iceberg17, who rate the exchange operator as an underperformer, think it will be a good buy, though perhaps not just yet:

This is a great stock to buy later ... with all the fear in the market even the provider gets dinged for no rational reason.

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.