Deathbed Stocks Revisited

For more than a year, we've been chronicling companies that appear to be on their deathbeds. As we note, not every company will give up the ghost. But since that original column, quite a few have either disappeared entirely or seen huge drops in their share prices: Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio, to name just a few.

We check for stocks that have drawn the lowest one-star rating from the 140,000-plus savvy investors in our Motley Fool CAPS community. Then we pair that information with various financial ratios, which flash like a neon sign if the end is near.

Now that a third of those original companies have gone under or otherwise vanished, lets take a look at some of those stocks we deemed to be on their deathbeds:

*Filed for bankruptcy April 16, 2009; delisted from NYSE on April 22. (Currently trades on pink sheets.)

Unlike previous trips back in time, in which nearly all of the companies reported lower returns, this group that appeared in early December had mixed and sometimes divergent results. While Dolan Media and MGIC Investment both nearly doubled in value since their appearance, General Growth Properties sought the protection of bankruptcy courts; its stock now trades over the counter on the Pink Sheets. So let's look a little more closely to see whether we can ascertain why some of these companies were able to recover, while others with a seemingly similar dire outlook could not.

Whistling past the graveyard
I can understand the concept of doing more with less, but I can't seem to grasp Vonage's policy of seemingly getting less from doing more. The VoIP provider recorded a much wider loss of $54.6 million last quarter, even as its average revenue per customer -- an important industry metric -- rose 4% to $29.89. The company even boosted new subscriptions in the last six weeks of the quarter, to more than double the rate in the first seven weeks of the period, on the strength of its new Vonage World program.

However, revenue fell 2%; the company had a net loss of 50,000 customers from the second quarter, despite the new program's boost; and customer churn rose to 3.4%. Most curious of all, the company's loss was actually triggered by a rally in its share price. Apparently, one feature of some of its convertible bonds increased in value as the stock rose, forcing Vonage to take a non-cash charge of $63 million. This was the main driver behind the company's quarterly loss.

It seems like Vonage is improving -- but shareholders apparently aren't allowed to join in the fun. Investors are hardly convinced, since the stock is down 6% on the day.

Just 28% of the more than 1,500 CAPS members rating Vonage think it will outperform the market. Highly rated CAPS member leohaas doesn't see how giving away all your business for free is a workable business model, while Option1307 thinks its heyday is long past:

While I have used their service when I was living overseas a few yrs. ago, and was relatively happy with it, I have to agree with most around here that their time has come and past. The filled a small niche for a while, cheap VoIP (Voice over Internet Provider); however, Skype is now equally as good and is entirely free for anyone with an Internet connection. Thus, I don't see how Vonage can compete with that. They would have to completely switch their mode of operations, and I don't see that happeneing. This was a good idea, eventhough it was a short lived run.

Rattling the cage
We'll be back next week to identify more stocks that are leaving investors feeling ill. In the meantime, you can 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 your favorite stock's CAPS page. Sign up today, absolutely free, and let us know whether you think a stock is headed for its demise.