5 Deathbed Stocks?

Editor's note: An earlier version of this article incorrectly stated that Sears Holdings did not release monthly same-store sales figures. The Fool regrets the error.

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 sickbay
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 145,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,300 stocks. We've unearthed a handful of stocks that look like they might be headed six feet under based on their one-star ratings, but we'll head over to CAPS to measure their opinions on a company's prospects.

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, with our primary screen being those stocks that CAPS investors have given one-star status to, 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 six feet under, 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 like the mythological figure of Charon conducting souls across the River Styx to the netherworld, we'll use the CAPS community as our guide to determine whether these stocks are destined to seriously underperform the market.

Whistling past the graveyard
Let's give credit where it's due. Sears surprised everyone with same-store sales that nudged north 0.4%, nothing short of a Christmas miracle during a month when JCPenney (NYSE: JCP) saw comps fall 3.8% and Dillard's (NYSE: DDS) was down 7%. It also raised its earnings guidance to $3.36 to $4.06 a share. Now that's a spread wide enough to drive a tractor-trailer through, but even the low end is well ahead of the $2.65 a share analysts were forecasting.

I definitely haven't bought into the Sears-as-growth stock thesis just yet, but I do give them the man-nod for still being able to generate prodigious amounts of free cash flow. I'm not alone in that assessment as 30% of CAPS members rate it to underperform the market, like All-Star regotoguy who likens the retailer to the emperor without any clothes.

Perhaps that's a little harsh since Sears has shown that as threadbare as its recent past has been it's still got enough to cloak itself in a projected fourth quarter profit. It's expecting to post earnings of as much as $465 million. Of course, that's going to be before charges for store closings, impairments, and other one-time expenses.

I view this glimmer of hope as only a brief respite before Sears resumes its downward spiral. But how about you? Head over to the Sears Holdings CAPS page and let us know whether you think the retailer will reign supreme.

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.