Top-Rated Stocks That Get Low Grades

The flipside to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests.

We've already looked at low-rated stocks that may deserve investor support, having earned high Corporate Governance Quotients (CGQ) from Institutional Shareholder Services -- the big name in corporate proxies. Today we'll look at otherwise top-notch firms that may do their shareholders a disservice.

ISS measures how well a company performs in as many as 63 categories, covering four broad areas. Moreover, each company is scored relative to its market index and its industry group. Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market, but which sport below-average CGQ scores, either in their index group or among industry peers.

Company

CAPS Rating
(5 max)

Index CGQ Ranking*

Industry CGQ Ranking*

Cal-Maine Foods (Nasdaq: CALM  )

****

2.8%

14.3%

Chesapeake Energy (NYSE: CHK  )

*****

18%

75.6%

ImClone Systems (Nasdaq: IMCL  )

****

32.7%

39.8%

NVIDIA (Nasdaq: NVDA  )

****

24.4%

81.9%

NYSE Euronext (NYSE: NYX  )

****

21.1%

78.5%

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

Investors should consider many factors before buying or selling 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.

A graphic presentation
Until recently, NVIDIA has certainly made graphics-chip-making look easy. Perhaps that's why Advanced Micro Devices (NYSE: AMD  ) jumped into the market whole hog with its purchase of ATI. Yet as AMD is finding out, looks can be deceiving, as it continues to write down huge swaths of value related to its acquisition.

Meanwhile, NVIDIA is having its own set of troubles. The company recently warned that revenue and profits wouldn't meet expectations, primarily because of weakness for its chips, but also because of product delays and lower prices resulting from intense competition. Intel's (Nasdaq: INTC  ) introduction into the sector has been a cause for concern as well, but with analysts expecting profits to surge over the next few years amid growing demand for better graphics rendering -- whether in Internet video, gaming, or movies -- NVIDIA could be set to explode over the next few years.

The earnings miss hasn't affected the way investors like CAPS player bbodien view the chip maker. This player sees a rebound in the making:

Huge selloff following the revised earnings forecast and announcement of faulty products, but this company remains the technological leader in its sector and has excellent prospects with its solid ties with games publishers, OEMs and component manufacturers. I predict that it will recover fully from this setback over a few months.

Trading down
Like sailing vessels mired on becalmed seas, stock exchanges adrift in markets unroiled by volatility are nonetheless in trouble, too. The exchanges make money regardless of which way the overall market is heading, because they get a cut on the trades. But without the brisk breeze of volatility to catch their sails, exchanges like NYSE Euronext are finding their profit potential caught in the summer doldrums. A protracted bear market, amid other worries, can make investors loath to trade.

Although the Nasdaq exchange is subject to many of the same vagaries, and trading makes up a larger portion of revenue for it than for NYSE Euronext, investors like top-rated CAPS All-Star FleaBagger see both outperforming an "anemic" S&P 500 -- although he prefers the Nasdaq:

This is a Fooligan pick. It's not my favorite. I think Nasdaq is a better company and will outperform [NYSE Euronext] as a stock. But exchanges in general are going to outperform the anemic S&P 500 over the next few years. Also, like Nasdaq, [NYSE Euronext] has been unfairly beaten down while its prospects and global presence have been increasing. But Nasdaq is totally better.

A Foolish quotient
Many factors go into whether a stock is a buy or sell. Do corporate governance policies enter into your equation? Head over to CAPS today and share your thoughts with other investor-analysts on whether you think these stocks ought to make the grade.

Chesapeake Energy and Nasdaq are Motley Fool Inside Value selections. NYSE Euronext is a Rule Breakers pick. NVIDIA is a Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days, for an up-close look at how to Foolishly win in the market.

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


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  • Report this Comment On July 14, 2008, at 1:09 PM, ruppert wrote:

    CHK annual report said they were one of the Fortune 100 best co's to work for. If they are good to their employees, chances are they will be good to their stockholders. I hope.

  • Report this Comment On July 14, 2008, at 5:23 PM, sicem1981 wrote:

    I can attest they are not good to their employees, they are AWESOME to their employees. I would love a stock split sometime soon!

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