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. While some will barely cling to life, others make a full recovery. Today, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 105,000-strong Motley Fool CAPS community, where players give the thumbs-up or thumbs-down to more than 5,700 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 6 feet under, having recently dropped from two stars to the lowest one-star rating.

First, we'll check out some quick tests for liquidity -- the current ratio and quick ratio (also called the "acid-test" ratio) -- which gives us 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 that 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 limitations to it.

A company scoring 3.00 and above is considered safe, scores between 2.70 and 2.99 are in 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 already given up the ghost?

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

You might be tempted to think that some of these need the ICU rather than a cemetery plot. Kodak, for example, seems to pass the short-term liquidity tests, although its Z-Score indicates careful consideration is due.

Moreover, not every type of company can be diagnosed by these quick tests: Financial institutions typically don't get measured by such ratios. Even so, stocks that CAPS investors have marked down to one star are possibly destined to seriously underperform the market in the future.

Dance or dirge?
Like its American rival General Motors (NYSE:GM), which appeared here last week, Ford is once again teetering on the edge of solvency as CEO Alan Mulally's effort to have the carmaker turn a profit got a flat tire recently. Investors didn't wait around to see what happened next, as they cashed in their shares in billionaire investor Kirk Kerkorian's tender offer bid of $8.50. It could be a long wait for the market to appreciate those shares that much.

Investors like CAPS player mbarno think that Ford remains out of touch with the car-buying public and that admitting you're a loser isn't exactly the way to gain adherents:

Ford is really reaching lately to find their niche with Microsoft technology but at the same time struggles to survive. With the economy on the rocks, the attempts of Ford should be to improve cost of production with translation to lower cost of products. They have cut costs of American jobs with lost faith in their largest market, but have not made the vehicles more affordable. Further, I can not recommend any company that admits recent defeat (i.e., advertisements that state their vehicle can now compare to Toyota). Did they really say that?

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.