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. 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 115,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,500 stocks. Data shows that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fare worst. We've unearthed a handful of stocks that look like they might be headed six feet under, and you might want to avoid them, as they've garnered no more than 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 -- 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?
|
Stock |
Current Ratio |
Acid-Test Ratio |
Altman Z-Score |
|---|---|---|---|
|
CA (NYSE:CA) |
1.1 |
0.9 |
2.09 |
|
Daimler (NYSE:DAI) |
1.2 |
0.8 |
1.56 |
|
Raser Technologies (NYSE:RZ) |
0.6 |
0.2 |
1.56 |
|
Knology (NASDAQ:KNOL) |
1.0 |
0.9 |
(0.27) |
|
Ryland Homes (NYSE:RYL) |
4.1 |
0.5 |
2.95 |
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor’s. *As of March 31, 2008.
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.
Checking for a pulse
With competitors like Symantec (NASDAQ:SYMC) galloping ahead, enterprise software specialist CA attracted a sense of ennui back in June from CAPS member mgladney, who finds it difficult to get worked up about the company one way or the other: "This company doesn't seem to have any focus on growth. It isn't a bad company, but it isn't dynamic either."
CAPS member thestockstalker says that investors sometimes need to block out all the negatives that surround a company like Raser Technologies and focus on what the business is doing:
Geothermal energy is not necessarily the best option in the United States, but the push for clean, renewable sources of energy is critical. Even if this company does not have its act together as of yet, it appears that it is beginning to take shape with its first plants being constructed and coming online. Assuming the company can last until revenue starts coming in, [Raser Technologies] will turn profitable.
Even without Chrysler appended to it anymore, Daimler has been hurt by the sagging U.S. car market. Yet where Chrysler, Ford (NYSE:F), and GM have determined that giving up leasing is at least in part a way to salvation, most of the other manufacturers, including Daimler, will be offering leases, which may give them a further edge. CAPS member Cyberman12 figures the Mercedes brand alone gives Daimler a further advantage:
Mercedes-Benz continues to show why thy are the number one Luxury Maker in the world.
ALL U.S. Luxury Vehicle Sales are DOWN, while Mercedes-Benz is UP 4% YTD. Fuel Efficient Hybrids are on the horizon and in the meantime they have a nice compliment of Fuel Efficient Diesel vehicles. The All New GLK Launches in January 2009 which will come in two engine variants, GLK350 and the GLK Blu Tek Diesel. Their Flag ship the S Class will be launching an S400 Hybrid in less than 18 Months, which delivers more horsepower and torque than most U.S. version V8 engines, and the fuel economy of some their smaller lighter vehicles.
Then you have Smart, Daimlers Bus Line (ALL HYBRID) etc. If there was one car maker to bet on, MY Money is on Benz!
Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they recover to shine again? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.
