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 make a full recovery. We're gathered here today to seek companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 97,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,600 stocks. The first year of collecting data suggests that CAPS' highest-rated stocks performed best, while its lowest-rated companies fared worst. We've unearthed a handful of stocks that look like they might be headed 6 feet under, having recently dropped from two stars to the lowest one-star rating.

We'll also check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid-test" ratio) -- which give us an idea of a company's ability to pay its bills. A current ratio above 1.5 and a quick ratio north of 1.0 mean it's able to meet its short-term operating needs. But watch out! Too high a value might mean the company is hoarding assets that could be better used elsewhere.

Here's today's list. The question is, are these companies only mostly dead, or have they truly given up the ghost?

You might be tempted to think that some of these need the ICU rather than a cemetery plot. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions, for example, don't get measured by such ratios. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

A flash in the pan
A spinoff from a joint venture of Advanced Micro Devices (NYSE: AMD) and Japanese chip maker Fujitsu, Spansion faced growing losses before its IPO, as the type of flash memory it specializes in -- NOR -- lost ground to the more popular NAND flash memory. Both types of memory are used to store data on cell phones, digital cameras, PDAs, and MP3 players, but unlike DRAM memory (the kind commonly found in personal computers), flash memory doesn't lose the information once you turn the device off.

NOR memory has been losing out to NAND because the latter is cheaper and writes data to memory more quickly, making it popular in devices like USB drives, medical devices, and Apple's (Nasdaq: AAPL) ubiquitous iPod. Wireless solutions that Spansion had hoped would help it haven't done so at all, and its first-quarter report last week reported much lower sales than expected and losses far larger than analysts had anticipated.

Despite its low rating by investors, few bears have been able to craft a pitch to explain why they think it will fall. Instead, the bull position like that posited by rickctx last December notes investment in new facilities, and says that potential in the China mobile market should keep it going:

Priced below asset value, opening new fab at 300 mm, consolidation of (less sexy) NOR vendors. NOR is needed to execute and store code in low-end cell phones to be sold in China, the largest cell phone market. First known fab build agreement with China at <=65 nm is under the radar. (Intel and IBM had to settle for 90 nm FAB's).

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 how you feel. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.