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 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 fared worst. We've unearthed a handful of stocks that look like they might be headed six feet under: You might want to avoid them, because they've earned no more than the lowest one-star rating.

First, we'll check out some quick tests for liquidity. The current ratio and the quick ratio (also called the "acid-test" ratio) give us an idea of a company's ability to pay its bills, and the Altman Z-Score predicts the likelihood of filing for bankruptcy protection. A current ratio above 1.5 and an acid-test ratio north of 1.0 mean the company is able to meet its short-term operating needs. For the Altman Z-Score, 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 filing for bankruptcy 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. As of Aug. 27, 2008.

Obviously, we 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.

A market disconnect
It can be profitable to call yourself a solar play, but you have to be able to back it up. Earlier this year, EMCORE trumpeted a huge $78 million deal with an outfit called Green and Gold Energy, but stock analyst Citron Research said the deal was of dubious merit. While management initially defended the deal, it recently announced that it had canceled all the contracts it had with Green and Gold to "wipe the slate clean." Seems the naysayers had something there.

Top-rated CAPS All-Star member drakitin writes that even aside from the valid questions raised by Citron Research, EMCORE's gallium arsenide technology is not ready for prime time:

Concentrated GaAs, although more efficient, is very far away from large-scale production. Even when all the quirks are worked out, [I] would think the technology will be licensed/adopted by a larger player in solar. I do not see an upstart like EMKR being the ONE to bring this to market. To wit, Boeing/Spectralab is working on the same technology and is getting efficiencies as good as or better as NREL (the technology EMKR is using). see here: http://upload.wikimedia.org/wikipedia/en/a/a4/PVeff%28rev110707%29d.png

And then there is CITRON . . .

Should it be surprising that a number of horse-racetrack operators have appeared on the deathbed list this year? Aside from Empire Resorts this month, Churchill Downs (NASDAQ:CHDN) and Penn National Gaming (NASDAQ:PENN) have each placed in the money here. Empire runs Monticello Raceway, a track I've frequented and enjoyed. Yet horse racing looks to be a slowly dying sport, sad to say, and Empire's hopes of building a casino on site at Monticello were dashed. It's now hoping to develop a harness track racino -- a track and casino -- and an "entertainment city" nearby with a new partner. Investors have been hoping for some time that Empire can get its casino built; CAPS member bdava50 noted last year how much was riding on it:

Everything hinges on their Monticello casino getting done. The governor … wants it, the [politicians] want it and the residents want it. I think it could really revitalize the Catskill region. Only some [obstructionist] environmental groups are standing in the way. They've already gotten all the environmental go aheads so it won't be long before the courts recognize the frivolity of all the litigation.

Litigation has been the norm for Empire, with disputes with the horsemen's union and a local Indian tribe draining its coffers. Whether this development can save Empire or the track remains to be seen.

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.