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. But 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

Index CGQ Ranking*

Industry CGQ Ranking*

Corning (NYSE: GLW  )

*****

23.2%

84.9%

MEMC Electronic Materials (NYSE: WFR  )

****

13.3%

63.2%

Mercadolibre (Nasdaq: MELI  )

****

31.2%

46.8%

Oilsands Quest (AMEX: BQI  )

*****

12.9%

19.4%

Oracle (Nasdaq: ORCL  )

****

46.0%

95.4%

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

Investors should consider many factors before buying or selling a stock, including how well it treats shareholders. Consider these rankings one way to gauge how these businesses stack up against one another, relative to their shareholder policies.

Oracle's no sap
While consolidation may have enabled software providers Oracle and SAP (NYSE: SAP  ) to raise prices on their products recently, that price hike also underscores both companies' industry-leading power. When your products are in demand, even in the face of a national business slowdown, you can command the prices you want without fear of losing customers. That's why pricing power may be the most important competitive advantage a company can possess.

Pricing power, coupled with an ability to make smart acquisitions -- Oracle's Larry Ellison seems to want to buy everything -- makes investors like CAPS member Robert685 think this will be a superhero stock to contend with:

B.E.A. great acquisition, [Oracle] on an acquisition BENDER....feeding frenzy... As long as [Oracle] executes on these purchases, and properly integrates into Larry's long term "package" strategy, this is a HULK that will be hard to compete with.

Crystallizing potential
It's easy to fall prey to hubris when you own 60% of the liquid crystal display market. Corning might have succumbed to such feelings when its CFO recently boasted that traditionally, TV sales remain unaffected by recessions. But reality soon interrupted that fantasy; Corning has since had to contend with a potential peak in LCD manufacturing because of weakening consumer demand. While discount retailers like Wal-Mart (NYSE: WMT  ) posted double-digit gains in flat-panel TV sales last month, it may be the last hurrah before a decline.

That's why some investors, including CAPS player ririe2, feel that Corning will underperform the market. In retrospect, the CFO might have been partly correct, but his statistics may have applied to more traditional TVs, rather than their pricier flat-panel brethren:

This company sales LCD flat panels for TVs. LCD tvs are a higher cost luxury TV. Generally when the economy is at a low higher dollar items such as this are less desirable when they can be substituted.

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

Wal-Mart Stores is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart 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's disclosure policy goes to the head of the class.


Read/Post Comments (3) | Recommend This Article (4)

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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 July 18, 2008, at 6:02 PM, donnfs wrote:

    GLW has been knocked by every analyst, every "expert" and by the Motley group. People will not buy ordinary TV's anymore as price decreases have made HDC and LCD tv's a bargain. The picture clarity and ease of use make the LCD's tv's the "must have" Head down to Circuity City this weekend and ask the sales clerks what's selling in this "recession"?

    This stock may be sucking wind at $20.20 but they'll still earn $1.5bn to $2.0bn this year. They'll pay down debt and boost R&D, just as they have done for the last five years. I wouldn't be surprised to see the dividend go to $.10 per quarter. When you own 60% of the market share you still control the pace of the sales.

    Keep knocking the stock.....but please keep the inaccurate comments to yourself.

  • Report this Comment On July 19, 2008, at 5:14 PM, Redstonecollect wrote:

    Loosers, Im buying a big tv or computer rather than driving to florida with these gas prices. And who is going to buy a car or home with interest rates rising. Ill just buy a computer and labtop and stay home with some popcorn.

  • Report this Comment On July 19, 2008, at 5:16 PM, Redstonecollect wrote:

    The glass is half full, not empty.

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