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 135,000-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 members' 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 illustrating 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. *As of 3/31/2009.

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
Real estate information provider Zillow sent me an email the other day telling me my home's value had increased 1.1% last month, marking the second consecutive month it's gone up. No matter that I'm still upside-down on my mortgage, at least we're moving in the right direction.

It's not just my home, either. In May, the S&P 500/Case-Shiller home price index reported its first price increase in two years, while new home sales jumped 11% in June -- the largest monthly jump in eight years. Although June's jump is certainly a positive sign, it's still the lowest sales number we've seen in more than 25 years. Nevertheless, housing looks like it may be bottoming, and possibly turning a corner for recovery.

Or has it? There could be another housing crisis brewing inside the Federal Housing Administration (FHA) as its insurance fund currently sits at 2% of its uninsured assets, the bare minimum it must maintain. Furthermore, if Deutsche Bank estimates are to be believed, nearly half of all mortgage-holders could be underwater by 2011, with some areas of the country -- Florida, California, and Las Vegas -- having 90% of homeowners owing more than their house is worth.

That could lead to more foreclosures, as foreclosure filings increased to a record 1.5 million in the first half of the year, putting pressure on prices once again. This is evident in the fact that new home prices are still falling, with the median selling price at $206,200 in June, down from $219,000 in May and $234,300 last year. That means builders like Ryland Group, Beazer Homes USA (NYSE:BZH), and KB Home (NYSE:KBH) will get squeezed even harder.

CAPS member Ewok82 feels the economics of the situation don't support Ryland growing:

Their only hope is to make cheap homes on inexpensive land and undercut the home prices from foreclosed properties. If they can do this with a good profit margin, they will be a winner. Not likely.

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.