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 make a full recovery. Kmart climbed out of the coffin of bankruptcy to become part of Sears Holdings, while United Airlines parent UAL recrossed the River Styx to fly the friendly skies once more. But in this column, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 83,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,400 stocks. A year's worth of data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks headed six feet under, having recently dropped from two stars to the lowest one-star rating. Are they only mostly dead, or have they truly given up the ghost?

Looking at the names on the list, you might be tempted to think that some of these might need the ICU unit at most, rather than a cemetery plot. The Hallmark Channel owner Crown Media, for example, just renewed a multiyear deal with Time Warner. However, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future. Crown is down 13% for the year; it's also trading a third lower than its 52-week highs.

A sugar daddy?
Patents without profits can only carry a company for so long, and so far, development-stage biotech Biodel has been living off equity financing. It has no products for sale yet but is in the process of developing two methods of insulin delivery: one injectible and one oral. Biodel has received a patent and has several others submitted for the technology used to develop those delivery systems, but it's by no means assured that the company will be successful as a result.

There are quite a few larger, better-financed competitors also searching for improved insulin delivery systems, but the going is tough. Novo Nordisk recently stopped development of an inhalable version, and Pfizer (NYSE: PFE) recently killed its participation with Nektar Therapeutics in an inhaled version of the drug. Biodel's VIAject system will compete against Humulin, made by Eli Lilly (NYSE: LLY). However, although it seems to be absorbed more quickly than Humulin, there's nothing yet to suggest that will be enough to cause patients to switch.

As for the oral form of insulin, previous versions have been ineffective because they break down too readily in the stomach, leaving little insulin available for absorption by the body. Whether Biodel's VIAtab can do better absorbed under the tongue remains to be seen.

In the interim, insiders have been rewarding themselves with pay raises and option grants, and a number of them offered more than half a million of their shares in a recent secondary offering. Biodel's founder has a decent pedigree, coming from rival MannKind, but patents and pedigrees don't add up to products or profits, and this biotech could go into insulin shock before it develops either.

That could be one reason a CAPS investor like zimn0016 says he finds the company's therapies to be uninspiring, and majakblue looked at Biodel's cash burn rate last summer and foresaw the recent fall in share price and new offering.

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they recover to shine again? On Motley Fool CAPS, you have the power to tell your fellow investors just what you think. Sign up today absolutely free, and let us know whether you think the Grim Reaper's at the door.