5 Deathbed Stocks

We've all head 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 will make a fully recovery. Sure it happens, but here 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-plus-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,400 stocks. Data shows that five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared the worst. We've unearthed a handful of stocks that look like they might be headed six feet under and you might want to avoid as they've garnered no more than the lowest one-star rating.

Then 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, and the Altman Z-Score which suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are "yellow flags," between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the crypt keeper could be employed soon.

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 being wheeled into the morgue yet, so don't short them based on their appearance here. Moreover, some companies don't neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have recently marked down to one-star status, meaning they are possibly destined to seriously underperform the market.

Possible rattlers
Is there a basis for prepaid calling card and VoIP wholesaler iBasis appearing on the list? While an argument could be made that with guidance having been revised downward and average revenue per minute -- a metric the company says is an important indicator of the financial health of its business -- declining, iBasis might be in sick bay. Yet as CAPS member MENGIV pointed out earlier this year, the company is the third largest in the international long distance VoIP market with a 7% market share and it's an industry that's growing. Having made several acquisitions over the past year iBasis is arguably in a better place than it has been:

iBasis Inc. is the worlds third largest buyer and seller of International telecommunications or overseas longd istance phone using Voice over Internet Protocol which is predicted to be a $65 billion dollar industry per analysts. Customers include AT&T, MCI, Sprint, and various government affiliated phone call carriers. ... With telecommunications industry as a whole down, this is a contrarian buy in anticipation that both the industry and this individual stock will improve in the next year to two years. They fell from 52 wk high of $10.88 a share to $3. a share with disappointing 1Q results.

A more forceful case could perhaps be made for auto parts supplier Magna International, where the impact of declining car sales is rippling throughout the industry. For example, Dana only emerged from bankruptcy early this year but is cutting jobs by year's end. Johnson Controls (NYSE:JCI), Lear (NYSE:LEA), and Delphi all face similar trouble. Moreover, the global financial crisis has forced a major shareholder of Magna, who also happens to be the richest man in Russia, to give up his stake in the company.

Shares in Magna reeled as a result, dropping to lows not seen since 2000. With Detroit's Big Three carmakers also seemingly on life support, even with their own mini-bailout package, we can probably expect to see more parts makers falling by the wayside. Surprisingly, though, nearly three-quarters of CAPS members chiming in still feel Magna will outperform the market, with 60% of the All-Stars concurring.

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.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team invested $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.