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 sickbay
Don't assume that all such companies are goners. Some will barely cling to life, while others will make a full recovery. 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 some 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed for the hereafter, based on their rock-bottom one-star ratings from our CAPS community.

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. The Altman Z-Score tries to identify 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 could be doomed.

Here's today's list. Do any of these companies have a chance?

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's. Rating as of May 15.

We obviously don't know for sure what will happen to these companies, so don't short them soley on account of their appearance here. Remember, some companies, including software makers and financials, don't neatly fit into the Altman Z-Score scale. Still, we can fall back on these stocks' one-star CAPS ratings, signifying our investing community's collective certainty that these stocks will underperform the market. Charter Communications, for example, filed for bankruptcy back in March, months after appearing here last June.

Back from the grave
I wouldn't drape the black bunting yet for Hot Topic, unless you're planning to host an underground rave party for the goth set. The teen clothier has become a retail dungeon of choice for young consumers, posting seven straight months of rising same store sales. Other previous trendsetters, such as Abercrombie & Fitch (NYSE:ANF) -- which stubbornly clung to a higher-priced strategy during the recession -- have had to give in at last and change tactics by incorporating promotions and discounts.

But don't be too quick to celebrate its return from the undead either. Hot Topic undoubtedly has enjoyed the phenomenal success of the Twilight books and movies, as well as the assorted vampire regalia that has caught teen consumer imaginations. But that means that the retailer will continue to remain subject to the fickle whims of trendy taste -- and if those trends turn against it, Hot Topic could see its sales streak disappear like a vampire come sunrise. Just ask Crocs (NASDAQ:CROX) shareholders about how quickly consumer fads can unravel fortunes.

CAPS member Northville thinks fickle shoppers will eventually move on:

The [numbers] look good, but the truth is that this company is a fad waiting to fall out of grace. I mean come on, a P/E of 25 for a specialty retailer in this environment, trading at toward the top of it's 52 week range. This company is going to fall....hard.

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 what you think about these and other companies you follow.