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 make a full recovery. But here, we're looking at companies that have all but given up the ghost.

For help, we'll turn to our Motley Fool CAPS community, where 130,000 members give a thumbs-up or thumbs-down to about 5,300 stocks. We've unearthed a handful of stocks that look like they might be in trouble, based on their having earned no more than the lowest one-star rating.

Then we'll put them through some quick tests for liquidity. The current ratio and the 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. On that scale, 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 are worse off than that.

Here's today's list. The question is, do these companies have a chance?

Sources: Motley Fool CAPS and Capital IQ, a division of Standard & Poor's.
mrq = most recent quarter. As of April 8, 2009.

We obviously don't know what will happen to these companies, 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 given one-star status to, meaning they could be destined to seriously underperform the market. Pacific Ethanol, for example, appeared here last June and has since run out of cash, defaulted on $250 million of loans, and could face bankruptcy if it can't renegotiate or find additional financing.

Nuts to you
It has been said that a camel is a horse designed by committee. What, then, are we to make of SunOpta, which has more disparate operations than a platypus has seemingly unrelated body parts. Its primary business is fruit and organic foods, which provides more than 90% of its revenue, but it also operates two other units: an industrial abrasives business and a biofuels processing technology.

While the amalgam of businesses reported seemingly strong revenue growth in 2008, a bit more than half was a result of acquisitions. In fact, since 1999, SunOpta has acquired about 31 companies. The company also has significant levels of debt (total debt to equity stands near 80%) and has a line of credit that must be renewed every year in June. It obtained waivers from its lenders last year so that it would not violate the terms of its loans, and while it has been able to meet the new terms thus far, the credit crunch might mean it won't be able to renew its credit lines or do so on favorable terms.

Other fresh fruit and organic produce companies like Chiquita Brands (NYSE:CQB) and Fresh Del Monte Produce (NYSE:FDP) have also lagged lately. However, CAPS member jester112358 sees SunOpta falling all the way.

Promotes ethical businesses and environmental [responsibilities], but not too strong on profits or cash flow. Should be at zero given enough time.

Peter Lynch had a word for companies that took up quixotic causes the way SunOpta has: "diworsification." Even if the company wanted to pour its cash into its food group business to prop it up, it would be difficult because $22 million of the $24 million in cash and equivalents it has on the books is committed to the biofuels venture. That means it's going to need to limp along, making more acquisitions or diluting shareholders with stock offerings, the way it did in 2007 and 2003. Neither situation sounds promising.

Rattling the cage
Are these companies doomed to drag their investors down? Or will they turn around? 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 how you think these companies will do.