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 sickbay
Don't assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. Here, however, 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 members 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 the worst. We've unearthed a handful of one-star stocks that look like they might be headed six feet under.
To dig up these potential ghouls, we'll check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid test" ratio) -- which give us an idea of a company's ability to pay its bills. We'll also look at the Altman Z-Score, which suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are usually considered safe; between 2.70 and 2.99 are "yellow flags;" between 1.80 and 2.70 are often considered likely to go bankrupt within two years; and scores below 1.80 mean the cryptkeeper is waiting.
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 |
|---|---|---|---|
|
Applied Energetics |
5.3 |
4.5 |
19.33 |
|
Blockbuster |
1.1 |
0.2 |
(0.07) |
|
Circuit City |
1.4 |
0.3 |
3.46 |
|
Palm |
1.3 |
0.9 |
0.86 |
|
US Airways |
1.1 |
0.8 |
1.48 |
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
We obviously don't know whether these companies are headed for the boneyard, so don't short them based solely on their appearance here. Some companies don't neatly fit into the Altman Z-Score scale. Still, our primary screen seeks those stocks that CAPS investors have marked down to one-star status, a ranking that may mean these companies are destined to seriously underperform the market.
A market disconnect
Despite an earnings report that looked pretty good on the surface, Applied Energetics couldn't energize investors with any sort of enthusiasm, and shares continued their descent. The ratios shown above don't make the company look like it's about to go into cardiac arrest. However, persistent losses, low margins, and bigger and better-financed competitors suggest the futuristic laser maker might face continued underperformance in its future.
CAPS member scorpionclone finds the company's debt levels worrisome, and thinks that investors would do well to use caution here: "Massive debt, hopes are based on a technology that hasn't reached it's prime. Stay far away."
Investors also seem wary of US Airways. Although the decline in oil prices has given the company momentary breathing room, it's still beset with high debt, high costs, and an abiding need to reduce capacity. It may be a while before this or any airline figures out how to become profitable.
Top-rated CAPS All-Star member jstegma figures that US Airways will fall into bankruptcy before it figures that out: "Airlines have a lot of restructuring of their business to do. Most likely they'll be doing it in bankruptcy."
Palm also needs to figure out its place in the market, and the company may just have bought itself some time with the release of its Treo Pro smartphone. Positioned to steal some thunder from both Apple
CAPS member ADGrange thinks the smartphone maker has come out of the ICU, transfused with fresh blood in both personnel and products: "I'm still a believer in a turnaround with Rubenstein's arrival, the latest Centro, strong brand name. Agree that industry is brutally competitive and Palm has had many missteps, but I'm using my 7th product from them and think a turnaround is very possible."
Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once 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.
