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 full 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-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 stocks. Data shows that newly minted five-star stocks offer the best opportunities for investors, while the lowest-rated companies fared the worst. We've unearthed a handful of stocks that look like they might be headed six 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, and 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 Crypt Keeper awaits.

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. *As of Aug. 30, 2008.

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 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.

Get in the zone
The thesis for a resurgent AutoZone would certainly appear to be intact: tight credit markets; consumers putting off major purchases, including new cars; making do with what you've got, including fixing up your own jalopy. Even the ratios for the No. 1 auto parts supplier seem to just be on the cusp rather than fully in red flag territory.

Yet the stock trades close to its 52-week high, sales were weak compared to a year ago, and same-store sales were down, suggesting that consumers are still loathe to shell out any bucks for repairs. Short interest, however, remains high at 4.3 million shares short, or 7.5% of the float, meaning the potential for a short squeeze could push the stock higher still.

CAPS All-Star BSHumphreyII agrees that a bullish story seems to be in place, but with high debt and intense competition from Pep Boys (NYSE:PBY) and O'Reilly Automotive (NASDAQ:ORLY), he sees the potential for a crash to come soon:

The sector story-more people fixing and maintaining their own cars in this economy rather than using mechanics or buying new ones-is a good one. However, this story seems to have sucked in a few too many buyers. From a purely technical perspective, it's scary for any retailer of this scale to be trading near its 52-week high.

While P/E multiple over 12 isn't out of the ordinary for this sector, I'd be leery of paying that for a retailer with this much debt in a market with this much competition. This stock is expensive -- look for a lot of selling at the first hint of bad news.

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.

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.