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 will make a fully recovery. Sure it happens, but here we’re seeking companies that have all but given up the ghost.

For help, we’ll turn to the clever coroners at our 125,000-person-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 stocks. Today, we’ve unearthed a handful of stocks that look like they might be headed 6 feet under based on their having garnered no more than the lowest one-star rating.

Then we’ll palpate their pulse with some quick tests for liquidity -- who knows, maybe we'll still find some signs of life! The current ratio and quick ratio (also called the “acid test” ratio) give us an idea of a company’s ability to pay its bills, and the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are “yellow flags,” between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the cryptkeeper is waiting.

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

Sources: Motley Fool CAPS; Capital IQ, a division of Standard & Poor's.

We obviously don’t know if these companies are headed for a dirt nap, so don’t short them based on their appearance here. Moreover, some companies like software makers and financials don’t neatly fit into the Altman Z-Score scale. Yet our primary screen is for those stocks that CAPS investors have given one-star status to, meaning they are possibly destined to seriously underperform the market. (One of the stocks we've highlighted in the past -- the maker of Rayovac batteries, Spectrum Brands, which first appeared here last April -- filed for bankruptcy protection last week.)

Getting left back
The FDA tossed drug developer POZEN a lifeline last week as regulators approved the method it used to measure the effectiveness of its experimental arthritis treatment, PN400, being developed with AstraZeneca (NYSE:AZN). Back in December the FDA questioned whether "endoscopically confirmed gastric ulcers" were the correct endpoint to be chasing. The agency changed course last week. Now POZEN can move ahead with filing a New Drug Application by midyear.

Shares jumped as much as 36% on the news and allowed POZEN to live up to its reputation as one of those stocks that shows resolve in January. Shares were up more than 40% for the month. 

CAPS member philsie2 believed in December that if the FDA ultimately sided with POZEN, then there could be a tremendous upsurge in the price, considering the other drugs in its pipeline, like Treximet, which it is developing with GlaxoSmithKline (NYSE:GSK): "If FDA accepts the gastric ulcer endpoint for PN400 and the PA program then we'll see a very strong move. ... Add to that a very good acceptance, so far, of Treximet there are a lots of positives in the making."

Rattling the cage
Are these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to 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 a stock’s CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper’s at the door.