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 will make a full 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 120,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to nearly 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 one-star rating -- the lowest.
Then we'll put them through some quick tests for liquidity -- who knows, maybe we'll 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, and the Altman Z-Score suggests companies in danger of filing for bankruptcy protection. Companies scoring 3.00 and above are considered safe, those between 2.70 and 2.99 are "yellow flags," those between 1.80 and 2.70 have a good chance of filing for bankruptcy within two years, and those with scores below 1.80 might be on their last legs.
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 |
Recent Price |
|---|---|---|---|---|
|
Hawaiian Holdings (NASDAQ:HA) |
0.9 |
0.7 |
1.21 |
$4.19 |
|
MGIC Investment (NYSE:MTG) |
0.6 |
0.5 |
NA |
$2.24 |
|
Regency Centers (NYSE:REG) |
1.0 |
0.6 |
NA |
$35.75 |
|
Ryder (NYSE:R) |
1.0 |
0.8 |
1.68 |
$34.90 |
|
Vonage (NYSE:VG) |
0.5 |
0.3 |
(1.83) |
$1.14 |
Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.
We obviously don't know if 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 could be destined to seriously underperform the market. And just last night, The Wall Street Journal reported that one of the very first companies identified in our Deathbed series -- Nortel Networks (NYSE:NT) -- is looking for legal advisors to help it explore bankruptcy protection, although a company spokesman said that no bankruptcy filing is imminent.
Nothing magical about it
As the economy continues to spiral downward, the chance that mortgage insurers like MGIC Investment or PMI Group (NYSE:PMI) will suffer bad results grows. Standard & Poor's has put both companies on its CreditWatch list as it considers whether the sour economy will prevent them from getting additional capital to refinance their debt, meet their debt covenants, or even maintain the capitalization level needed to stay viable.
Even back in September, CAPS member drdvde realized MGIC Investment was a risky proposition. But he felt that with the changes MGIC was making to its loan requirements, it might just be able to work things out:
Revenue on track to exceed 2006 levels. PMI is going to be required on all mortgages without 20% down and it is going to cost more. If housing is likely to bottom by mid 2009, it will require buyers to obtain mortgages. Increasing demand for services from the largest of the PMI providers should equal a rising stock price. Debt to equity ratios look good (<50%) and there has been steady insider buying over the last year. It scares me to make this call, but I think it is a reasonable one over 3-5 years.
Aloha, tourism
For a while there, it seemed as though a race to the bottom was on between the airline and the auto industries. But with oil prices' precipitous decline these days, airlines like Hawaiian Holdings, the islands' largest carrier, seem to be experiencing a bit of a reprieve. Even so, fewer people are flying to Hawaii, leading to lower load factors. That could spell trouble for Hawaiian, which depends on continuing growth in tourism.
Still, CAPS member CatfishMcCoy thinks the lower prices will be enough to keep Hawaiian Holdings going:
Currently undervalued niche airline that should profit more from lower fuel prices over the next 6 months or so.
Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they come back to life? 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 is at the door.
