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. Here, we're seeking companies that have all but given up the ghost.

For help, we'll turn to our 135,000-strong Motley Fool CAPS community, where members give the 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 one-star ratings, but we'll head over to CAPS to measure the opinions about a company's prospects.

Then we'll run 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 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 protection within two years, and those with scores below 1.80 are in worse trouble.

Here's today's list. The question is, with our primary screen illustrating those stocks that CAPS investors have given one-star status to, 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 April 24, 2009.

We obviously don't know if these companies will ever file for bankruptcy protection, 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. We'll use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market.

Whistling past the graveyard
Had Dollar Thrifty been included among the companies we regularly check with these metrics months ago, it might have seemed even more relevant. Back then, the car-rental company was trading for less than one dollar, and all businesses related to the auto industry -- from the manufacturers to their parts suppliers -- looked to be in big trouble. Chrysler, one of Dollar Thrifty's biggest suppliers, ended up going through a government-sponsored restructuring.

Six months later, we find that Dollar Thrifty's share price has appreciated more than 2,600%. Yep, you read that right. How? Not because the company used any reverse stock split to artificially inflate share values, but rather because it disregarded analyst expectations and shook the market with a 15% increase in profit. Yet it's not alone. The car-rental business was apparently the hot spot of the past half-year, as shares of Avis Budget Group (NYSE:CAR) rose more than 1,900% over the same time, though Hertz (NYSE:HTZ) -- a sick-bed stock at one time-- "only" tripled in value.

Despite the performance of these stocks, there's a lot to indicate that the market could still step on the brakes. Consumer confidence in the economy dropped again in July, and Dollar Thrifty acknowledges that the sour economy has been putting a big dent in passenger travel. Even though profits rose in its latest quarter, revenue slumped 10% as rental days dropped 20%. Without strong consumer demand, CAPS member DavidBear is bearish on Dollar Thrifty.

This is simply overbought. I don't see where real growth will come from in the auto rental sector.

Rattling the cage
Are these companies doomed, 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 what you think.