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 sickbay
Don't assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. All the same, today we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 120,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 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 stocks that look like they might be headed six feet under, based on their flatlining one-star ratings.

Then we'll palpate their pulse with some quick tests for liquidity -- who knows, maybe we'll still find some signs of life! The current ratio and quick ratio (also called the "acid test" ratio) give us an idea of a company's ability to pay its bills. The Altman Z-Score signals 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 mortician is waiting.

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 June 30, 2008.

We obviously don't know whether these companies are headed six feet under, so don't short them based on their appearance here. Moreover, some companies like software makers and financials don't neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have marked down to one-star status -- meaning they are quite possibly destined to seriously underperform the market.

What's the deal with Dillard's?
Department-store operator Dillard's has come apart at the seams, as the recession and accompanying job losses slow sales in the retail sector. Management is under attack by two hedge funds, both of which wish to oust the Dillard family that runs the chain. Undoubtedly, the funds want to avoid the risk that Dillard's could go into bankruptcy, as competitor Mervyns did. With consumers unwilling to part ways with their cash, Dillard's saw a 12% decline in October same-store sales, while its stock has fallen more than 75% from its highs.

CAPS member LimoPilot1 looks at better competitors like Kohl's (NYSE:KSS) and thinks Dillard's days are numbered:

This Christmas is going to start the demise of these [higher] volume retailers. With the exception of Wal-Mart and Kohl's (which I really don't put in the same category) these merchandisers are going to take an absolute beating. My guess-companies like Dillard's are going to start massive layoffs / shutdowns just after the holiday sales numbers are announced as the most paltry numbers on record.

H&R on the chopping block
It's not like it needs the money, says H&R Block management, but the $145 million it raised in a recent secondary offering does provide it with a bit of capital cushion -- and it didn't hurt in influencing Fitch Ratings' decision to affirm the company's BBB rating. H&R Block also got a boost from the $312 million it earned for selling its advisor unit to Ameriprise Financial (NYSE:AMP), as the company decided to focus on its tax-prep business instead.

In September, CAPS member chronicallyill22 felt that given all the markets' upheavals, H&R Block should still have a solid business helping people sort out the rules and regulations pouring out of Washington: "Hyper-Contrarian it looks like. With all these new rules and regulations coming out from the government due to the credit crunch, financial advisory consultants will get more business as businesses and firms evaluate what they can and can not do now."

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.