In the wake of the investor-ruining Enron and WorldCom scandals, and the options backdating fiasco, "corporate governance" became the watch phrase 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 remains a worthwhile pursuit. Companies with poor corporate governance could be targeted by shareholder activists, hedge funds, or short-sellers, making them ripe for a fall. Some evidence supports the notion that companies 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 -- which also provides opinions on corporate mergers -- a company's CGQ measures how well it performs in as many as 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 (out of 5)
|
Index CGQ
|
Industry CGQ
|
|
Continental Airlines (NYSE: CAL )
|
*
|
86.1%
|
77.4%
|
|
E*Trade Financial (Nasdaq: ETFC )
|
***
|
64.4%
|
91.8%
|
|
Microsoft (Nasdaq: MSFT )
|
***
|
99.2%
|
100.0%
|
|
Motorola (NYSE: MOT )
|
**
|
87.6%
|
99.0%
|
|
Priceline.com (Nasdaq: PCLN )
|
**
|
77.9%
|
69.6%
|
Source: Yahoo! Finance, Motley Fool CAPS.
There are many factors investors should consider before buying a stock, including how well it treats shareholders. View these rankings as a way to gauge how these businesses stack up against one another, relative to their shareholder policies.
Trading up
Getting involved with mortgage-backed securities nearly wrecked retail brokerage house E*Trade Financial. Since the subprime market implosion, it's been getting its financial house in order, though the market thus far has not appreciated its efforts. Still, the brokerage half of its business remains healthy. Investors like CAPS player owshx feel that once the crisis on the banking side of the business has corrected itself, the market will fully appreciate the value this company holds:
E-Trade was almost in the dumps not too long ago. Now with almost a $billion$ in total revenue this past quarter (2.2bil all of '07) they are looking at coming out of the red in the near future. "1,000 new accounts a day" - Sound familiar? Of course, if you watch TV. That adds up. Finally, the main reason for jumping on this wagon.... E*Trade on your blackberry!!! Whats better for all those trading gurus out there than to be able to trade where ever you are. No more "wish I had my computer" moments.
Dialing in
Motorola seems to enjoy the roller-coaster ride its business offers. Way back when, the cell-phone maker was the lead investor in a doomed satellite phone company called Iridium. Its shares plunged in the aftermath of that debacle, but it managed to claw its way back up, capturing as much as 20% of the cell phone market with its innovative offerings.
Now, however, Avian Securities estimates that Motorola has at best an 8.5% share -- down from more than 9% in the first quarter. Meanwhile, smartphone makers Apple (Nasdaq: AAPL ) and Research In Motion (Nasdaq: RIMM ) continue to improve their handsets, even as Motorola's Q reportedly languishes. Investors like DLai0001 have little hope for a Motorola turnaround:
I really don't think [Motorola] will pull off some sort of hat trick unless they can poach a bunch of iPhone developers or something... The rest of the field now has similar or better phones in that category.... So only place to go with to add more features and make things cheaper. 2 things motorolla isn't very good at doing... [I]n the age of cheaper and cheaper phones, the expectation for a carrier to subsidize something that's considered a "standard" phone with "standard" features, isn't something carriers would be willing to do. They probably will prefer to subsidize a smart phone which they can upsell a profitable data plan with. (*cough iPhone*).... Phones that are not just phones, but also mobile platforms.
A Foolish quotient
Head over to CAPS today, and share your thoughts with other investor-analysts on whether you think these stocks make the grade.
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