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 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 130,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to more than 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed for trouble, based on their one-star rating (the lowest CAPS offers).

Then we'll check their pulse with some quick tests for liquidity. 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 bankruptcy. 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 protection within two years, and those with scores below 1.80 might be doomed.

Here's today's list. The question is, are these companies only mostly dead?

Sources: Motley Fool CAPS and Capital IQ (a division of Standard & Poor's). As of most recently available quarter.

We obviously don't know where these companies are headed, 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 remains those stocks that CAPS investors have rated one star, meaning they might be destined to seriously underperform the market. We noted last month that chip maker Spansion, which had appeared here last April, reported that its Asian subsidiary had filed for bankruptcy, and now it has filed itself.

A legal eagle
Even with the recession eating into travel plans and CAPS members dropping its ratings to one star, Priceline.com doesn't seem to be in any danger of going out of business anytime soon. Pre-Paid Legal Services, on the other hand, is under assault from the Fraud Discovery Institute, which has made a number of allegations and compares the company's business model to Bernie Madoff. Amid the general fear in the market, this drumbeat of negativity may be hard to counter.

Like USANA Health Sciences (NASDAQ:USNA) and Mannatech (NASDAQ:MTEX) in nutritional supplies, Pre-Paid Legal is a multi-level marketing (MLM) business; it uses a membership formula to offer legal services. With nearly three-quarters of Pre-Paid's memberships sold via its MLM base, the company admits its ability to grow revenues further depends in large part on expanding or enhancing its sales force. That reliance is at the root of negative allegations about the company.

Regardless of those allegations, there are more practical concerns for investors here. Membership sales fell rapidly, down 12% in the fourth quarter and off 18% for the year, while the number of new sales associates dropped 10% and 18%, respectively. It reported higher net income for the quarter, helped in part by a smaller income tax provision, but insiders continue to sell their shares even as the company authorizes new buyback programs. Although insiders can sell their shares for a variety of reasons, buybacks can sometimes prop up earnings per share in an unsustainable way.

CAPS member Buddytoo unabashedly favors Pre-Paid's business, arguing that new plans will draw customers. But others like fastflappraisals have a decidedly more jaundiced view. fastflappraisals writes:

Questionable business model. The accusation of being accused of a pump and dump business model along with a pay structure that does not add up. Within current conditions, there is the potential if the stock hits certain support levels there will be forced liquidation.

Rattling the cage
Are these companies doomed to drag their investors into underperformance? Or will they be resurrected? 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 what you think.