5 Deathbed Stocks

We've all heard of the "death rattle," the last gasp from an ailing soul. Sometimes, we can hear it from the companies we invest in. Revenues dry up. Margins contract. Profits evaporate. All of these signs suggest that conditions are getting worse -- 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 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 diagnosticians at our 100,000-plus-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 six feet under, having recently dropped from two stars to one, the lowest rating.

We'll also check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid-test" ratio) -- to get 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 means 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.

We've also added the Altman Z-Score. In the 1960s, Edward Altman used statistical techniques on five financial ratios to predict the likelihood of bankruptcy, based on those ratios alone. The New York State Society of CPAs has said the Z-Scores are the "tried-and-tested formula for bankruptcy prediction," but please note -- it's not designed to be used in every situation, and there are some limitations to it.

A company scoring 3.00 and above is considered safe; scores between 2.70 and 2.99 are the "yellow flag" zone; scores between 1.80 and 2.70 mean the chance of going bankrupt within two years is good; and scores below 1.80 mean "Watch out below!"

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

Looking at the names on the list, you might think some might need the ICU unit at most rather than a cemetery plot. Troubled Esmark, for example, may be revived by a buyout. Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions, for example, aren't measured by current and quick ratios. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market.

Not something to gamble on
With the odds always stacked in the house's favor, it's hard to imagine that casino operators could make a losing bet. But with a worsening economy and consumers strapped for cash between rising food and fuel prices, and it's actually a pretty safe bet that we'll see more problems befalling the industry. Not only has privately held Tropicana filed for bankruptcy protection, but MGM Mirage (NYSE: MGM) also saw its quarterly profits fall 30% last week.

All those factors have hit Las Vegas-based casino operator Riviera Holdings right in the gaming tables. "Record-high gas prices, access issues due to neighboring construction problems, a statewide smoking ban in casinos in Colorado, and a weakened economy all contributed to lower consolidated financial results in our first quarter of 2008," said CEO William L. Westerman. The casino saw last year's first quarter $2.6 million profit turn into a $5.8 million loss this year.

That doesn't surprise CAPS investor slm05k, who even discounts the value of the land the casino purportedly owns, among other comments.

LOL if only they actually owned it. The bank does and the money they owe to various other places. Take a look at a balance sheet for goodness sakes instead of just blindly saying well they are on the strip so they are obviously worth more ....

Second, sure people are still going to [V]egas, but they [aren't] going to crappy places like the [Riviera]. Have any of you actually been or compared the [Riviera] to other hotels? When people go to vegas they want to feel rich, even middle class people. Nicer hotels that you can stay in for cheap are going up every second that make the [Riviera] look [terrible].

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.