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. Revenue dries 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, though, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 140,000-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 whose one-star ratings in CAPS suggest they might be headed six feet under. 

Now, we'll palpate their pulses with some quick tests for liquidity -- who knows, maybe we'll still 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 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 mean the cryptkeeper is waiting.

Here's today's list. Are these one-star 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 Aug. 30, 2008.

We obviously don't know whether 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. Like the mythological figure of Charon conducting souls across the River Styx to the netherworld, 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
Casinos in Las Vegas and Atlantic City are high-profile places, and with the economy stuck in a grim morass, their sorry financial condition is all but impossible to ignore. Not only is the deck stacked against the likes of Harrah's Entertainment and Trump Entertainment on the east coast, and Las Vegas Sands (NYSE:LVS) and MGM Mirage (NYSE:MGM) out west, but these high rollers also have mountains of debt piled high against them.

Pity small-time casino operator Pinnacle Entertainment, then. It has to contend not only with the economy and its own financial miscues, but also with regulators in Missouri who are also rocking the boat.

The riverboat gambler sought to refurbish its President Casino -- which sits atop a decrepit barge on the Mississippi River, in sight of St. Louis' Gateway Arch -- by putting it on a separate riverboat. In a game of linguistic gymnastics, regulators say that a casino license is tied to the boat on which it sits, not to the casino itself or to the company that owns it. In other words, if Pinnacle wants to replace its ailing ship, it needs to apply for a new license. Doing so, however, opens up the field to competitors, who can then apply for the license as well. Missouri has legally capped the number of licenses at 13, and all have been claimed.

Although Pinnacle still operates six other domestic casinos, as well as one major casino in Argentina (along with several smaller ones), the casino business isn't doing well enough that the company can afford to lose one of its licenses. Highly rated CAPS All-Star member mrindependent doesn't think it's worth doubling down on Pinnacle:

Pinnacle Entertainment operates seven casinos-most in the United States, but none in Las Vegas. Its management has been recklessly expanding for the past five years despite the fact that the company is a perpetual money loser. I don't see any way the company can pay its debts.

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 whether you think the Grim Reaper's at the door.