5 Deathbed Stocks

We've all heard of the "death rattle," the dying sounds emanating from a lost soul's lungs as the end approaches. Think of the sound Velcro fasteners make as they're pulled apart.

Sometimes, it seems as though the companies we invest in are giving off their own signs that the end is near. Revenues dry up. Margins contract. Profits evaporate. It's a visual cue that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bay
Not all companies that plunge into the abyss will die. Some will linger in a nether state, while others bounce back. Kmart climbed from the coffin of bankruptcy to become part of Sears Holdings. Similarly, UAL, the parent of United Airlines, recrossed the River Styx to fly the friendly skies once more.

Yet what we're seeking here are companies whose breathing is so labored that, for all intents and purposes, they've given up the ghost. To do that, we turn to the 80,000-strong investor intelligence community of Motley Fool CAPS.

Checking out the morgue
This investing platform rates stocks and investors and assigns a rating to each: Stocks get one to five stars (five is best), and players get numerical scores up to 100. With a year's worth of data to test, the morticians digging through the information have found that stocks with the highest ratings did best, while those with the lowest fared worst. Yes, I know -- "Duh!" But we can begin to use this data to our advantage.

Below are a handful of stocks that are on the way down. They have recently dropped from a two-star rating to the one-star bottom. Are they suffering from a bad case of the flu, or is it the death rattle we hear?

Looking at the names on the list, you might be tempted to think some need the ICU unit rather than a cemetery plot.  Genesco, for example, depsite having serious operational problems, may soon be relieved of them as Finish Line has been ordered to finish the acquisition it started but tried to bail out on. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

A condemned property
Considering the state of housing these days, it's not difficult to understand why  M.D.C. Holdings  has been given the stink eye by investors. New ill winds are buffeting the sector, with KB Home (NYSE: KBH) releasing an earnings report yesterday that showed far steeper losses than even the most pessimistic analyst had foreseen. While much of the loss was attributed to charges related to its deferred tax assets, order cancellations are growing and orders for new homes continue to drop. Mortgage lender Countrywide Financial (NYSE: CFC) is also under the gun, fending off rumors that it is in the process of filing for bankruptcy protection.

When top-rated CAPS All-Star TheGarcipian, with a 99.59 player rating, penned his bear pitch in October, he was anticipating some scary events yet to unfold in the housing market -- correctly as it turns out.

MDC Holdings is not in as bad a position as other home builders ... but they are still precariously balanced and leaning toward a continued downwards slide. They carry a huge debt load ... with a Book Value ... greater than the current stock price... I think the book value will slide along with the stock over the next 6 months ... [F]or the sale price of the entire company, a corporate raider wouldn't get much earnings out of this woodpile. Return on Equity and quarterly revenue & earnings growth are all negative ... Debt-to-equity is better than others in this industry... I think [shareholders are] not going to be all that happy over the next 6 months.

Rattling the cage
So are these companies doomed? Will they go on to spend time in pain and penury -- along with their investors? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors just how you feel. Sign up today -- it's completely free! -- and let us know whether you think the Grim Reaper is just outside the door.