Low-Rated Stocks That Deserve Your Support

In the wake of the scandals that ruined investors in Enron and WorldCom and the options backdating fiasco, "corporate governance" became the watchphrase of the new millennium. One result was the Sarbanes-Oxley Act, a tough, costly, and, some argue, overly burdensome means of keeping a closer eye on corporate management.

A lot of water has passed under the bridge since then. While "corporate governance" doesn't excite investors like it once did, keeping tabs on the risks posed by our companies and their boards is still a worthwhile pursuit. Companies with poor corporate governance could be targeted by shareholder activists, hedge funds, or short-sellers. They could be ripe for a fall. Some evidence supports the notion that those with stronger governance have lower risk, increased profitability, and higher valuations.

Below, we'll be looking at stocks that have been marked to underperform the market by investors on Motley Fool CAPS, but which have above average Corporate Governance Quotients (CGQs). Developed by proxy service Institutional Shareholder Services -- you might have run across the group when it weighs in with opinions on corporate mergers -- a company's CGQ measures how well it performs in up to 63 categories covering four broad areas. Moreover, each company is scored relative to its market index and to its industry group.

Here are five that I'm highlighting today:

Company

CAPS Rating (5 max)

Index CGQ Ranking*

Industry CGQ Ranking*

Sirius Satellite Radio (Nasdaq: SIRI  )

**

66.5%

78.3%

First Solar (Nasdaq: FSLR  )

**

85.1%

73.4%

General Motors (NYSE: GM  )

*

97.3%

100%

National City (NYSE: NCC  )

*

99.8%

100%

Dendreon (Nasdaq: DNDN  )

**

69.7%

76.3%

Source: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared to companies in index or industry. Higher is better.

Although there are many factors that an investor should consider before buying a stock, how well it treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another on their shareholder policies.

Foot-dragging
When it comes to Sirius, the obvious question is when will the merger with XM Satellite Radio (Nasdaq: XMSR  ) finally happen? The FCC has dragged out this process to the detriment of shareholders on both sides. Yet if and when the approval comes through, the two companies stand to be in much better stead, even before the deal would be consummated, which makes some analyst downgrades seem curious. CAPS investor granolaheadesq concurs:

Merger will eventually occur. What was good at $3 is better at 1.95 even with the worse credit market and economy. Will be well positioned for growth as combined company during economic recovery. Open source devices will help popularize.

An array of options
Without having to rely upon polysilicon for its thin-film solar panels, First Solar has been able to avoid the commodity shortage that has plagued a number of its rivals, letting it boost profits. Coupled with plans for increases in manufacturing capacity, First Solar's future is looking bright indeed.

CAPS investor owshx likes the thin-film technology as a differentiator between the many competing solar firms:

First Solar is the leader in the new wave of solar energy, thin film technology. These new flexible panels are easier to install, transport, and can be integrated onto almost any surface. Instead of silicon, which is in high demand (aka shortages) due to the green/solar push worldwide, it uses cadmium telluride semiconductor material to convert sunlight into electricity. Both elements are byproducts of the mining and production of base metals such as zinc and copper, so there is currently plenty to go around.

A mortgaged future?
National City grabbed headlines when a group of lenders led by Corsair Capital rode to the rescue, infusing the bank with some $7 billion to shore up the balance sheet. It's now operating under a memorandum of understanding with regulators, which often results in banks maintaining adequate capital and improving lending standards. It isn't easy finding investors willing to back these banks these days. As top-rated CAPS analyst JDSancho writes, cutting dividends is bad news -- and cutting them twice is worse:

If you've read my other pitches, you'd know that I am making underperform calls based on looming dividend cuts at banks and regionals. A dividend cut usually results in a stock swoon, and thus, a higher score for me in CAPS. National City has already cut its dividend twice this year, so it doesn't fit my mold. But, I am still giving [National City] a red thumb because of the fact that they had to cut twice this year. Good companies don't have to cut dividends. What does that say about companies that cut twice?

The whole situation makes you wonder about the high CGQ scores, doesn't it?

A Foolish quotient
Many factors go into whether a stock is a buy or sell. Head over to CAPS today and share your thoughts with 110,000 other Foolish investors.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2008, at 3:14 PM, Matt8265 wrote:

    You assume that the FCC is capable of making a decision don't you?

  • Report this Comment On June 26, 2008, at 4:28 PM, rraintl wrote:

    Questioning the CQG score is indeed suspect with National City as an example. As a former employee who quit because of the uncertainty created by this gross judgement error on behalf of senior management, I question where was the Board or how qualified and independent was the Board in overseeing this Management.

  • Report this Comment On June 27, 2008, at 1:22 PM, McNabRanch wrote:

    Why don't one of you people who is a pal of Gates tell him to give up on Yahoo and make something happen in a wide open new biz with all sorts of tech possibilities?....he likes that stuff, and all MSFT is doing is piling up money and losing stock value.

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