Deathbed Stocks Revisited

For more than a year now, 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 the first column in the series, quite a few of those we’ve profiled have either disappeared entirely or seen huge drops in their share prices. There’s Fannie Mae, Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, and XM Satellite Radio, just to name a few.

We check for stocks that savvy investors in our Motley Fool CAPS community of more than 145,000 members have given the lowest rating -- one star. Then, we pair that information with various financial ratios, which can provide a flashing neon sign that the end is near.

Now that a third of those original companies have gone under or otherwise disappeared, let’s take a look at some of the other stocks that were deemed to be on their deathbeds.

As we check back on our candidates this month, we see that while there have been some diverse results over the past year, the most striking are those that went on to record phenomenal success. So let's look a little more closely to see if we can ascertain why some of these companies were able to recover, while others with a similarly dire outlook could not.

Whistling past the graveyard
Perhaps the most spectacular turnaround was experienced by women's clothing retailer The Talbots, whose signature red door could have been a metaphor for the heavy debt load that hung over the company. Not long ago, it was closing stores and laying off hundreds of workers, and it suspended its dividend.

However, there were several developments throughout the year that helped boost confidence in the retailer's future. It was able to restructure some of its debt, and it unloaded the mistaken J. Jill acquisition onto a private equity firm for $75 million, the high end of the chain's valuation. Still, that was a big markdown from the $517 million it originally paid back in 2005.

And while the company got a lift from a move designed to bring in cash, Talbots' frequent Foolish critic, Alyce Lomax, viewed the acquisition shenanigans with BPW Acquisition as little more than a shell game. Nonetheless, it’s clear that Talbots’ position a year ago required it to take some drastic actions, and so far the stock has responded well to management's maneuvers, though investors remain doubtful that it can keep the momentum going.

Over on CAPS, almost 70% of the members rating the retailer believe it will underperform the market. CAPS member dangerdynasty sees the company still weighted down by an ugly debt load, and LatePlay thinks it's only benefited from a short squeeze.

Perhaps the most damaging analysis comes from All-Star member TSIF, who sees warning flags being raised by the recent acquisition:

So lets see. 55 Million shares outstanding now. Retire about 30 Million that AEON holds. Sounds good so far. Then issue a yet to be determined quantity, but based on a 65% ownership, about 45-50 Million shares to BPW for a total of at least 72 Million shares plus warrants. Balance paying down the debt against the new shares issued and you might not be that bad off. Factor in that the company you bought to do this now owns about 65%, the loss of board control, etc, and it's hard to say where you will be. In the reverse scenerio, when a private firm buys out a public firm, in most cases, (granted not all), the best is gutted and the rest left to flounder. IN this case, the same thing appears to be happening, except the public firm is buying the private firm. The end result is questionable at best and far from worthy of reward by the shareholders.

In short, this CAPS player sees the retailer still in some grave trouble, and predicts that common shareholders will ultimately come out on the wrong end of the deal.

Head over to the Talbots CAPS page and let us know if this deal also makes you see red.

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.