"Superlative" Stocks to Avoid

Not every superlative means that a stock is actually super. In one new ranking from Consumer Reports, the "winning" stocks could be well worth avoiding.

The venerable magazine's online offshoot The Consumerist released the final results of its yearly version of the March Madness tournament. The site pits brackets of companies against one another, gathering reader votes on its way toward a climactic showdown for The Worst Company in America. Last week, BP (NYSE: BP  ) emerged as the deeply dubious victor.

That's one bad reputation
With the anniversary of the Deepwater Horizon accident and subsequent Gulf of Mexico oil spill upon us, BP's dishonorable mention seems perfectly timed.

As much as some corporate managers seem to think that the public has the collective attention span of a sand flea -- witness Transocean (NYSE: RIG  ) management's recent attempt to bestow financial congratulations upon themselves for "safety" in 2010 -- Americans don't seem to have forgotten BP's transgressions. The Gulf of Mexico disaster still lingers in the public's minds, which is bad news for BP investors who were convinced this company could somehow sail through this mess and sanitize its besmirched reputation.

Hot on the heels of being named America's worst company, BP turned around and sued Transocean, Cameron International, and Halliburton (NYSE: HAL  ) , further emphasizing those companies' shared blame for the incident. The voting probably had nothing to do with that decision; there are tons of reasons, financial and otherwise, that BP would want to dilute its own culpability in the Deepwater Horizon disaster. But being nationally reviled definitely can't do the company any good.

In a possible attempt to regain our favor, and appease federal and state governments in the process, BP has pledged a further $1 billion for Gulf Coast restoration. Just don't forget that it's also seeking to gain billions from the business partners it's now suing.

Bad company
In the final showdown, BP beat out Bank of America (NYSE: BAC  ) as the worst of the worst. However, this was one nailbiter of a match: 50.87% of respondents voted for BP as the worst corporate villain, while 49.13% voted for Bank of America. The Consumerist decided to give Bank of America a scatologically named second-place prize, stating that this vote marked the slimmest margin of victory in this competition's six-year history.

If you're curious about what other companies earned honorable mentions in this grim competition, Ticketmaster and Comcast (Nasdaq: CMCSA  ) both got knocked out of the Final Four bracket. However, that doesn't make any public rancor against them or their oft-decried customer service any less serious.

Intangibles matter
When companies stir up increasing amounts of ire among the customers on whose patronage they depend for survival, investors should take notice.

One way or another, negative consumer sentiment will almost always erode sales growth over the long haul. Even if customers can't reject a corporate baddie now, one day a rival will come along, promise better treatment, and poof! Bye bye, customers. We could probably call this The Blockbuster Principle, since the video rental chain's dismal fate stemmed almost entirely from its own customer-unfriendly behavior.

Whether you're seeking the bottom of the barrel of the cream of the crop, sifting through stocks to find these extremes can definitely help your investing. Several organizations attempt to quantify different forms of goodwill in the corporate realm. For example, Harris Interactive releases an annual Reputation Quotient score, and Corporate Responsibility magazine releases its "100 Best Corporate Citizens" list on a yearly basis, tracking companies on a variety of metrics such as employee relations, corporate governance, and many other positive factors.

Such data can make a great starting point when conducting investment research. Last year's top company in Harris Interactive's Reputation Quotient survey was Berkshire Hathaway (NYSE: BRK-B  ) ; Corporate Responsibility magazine's No. 1 "Best Corporate Citizen" was Johnson Controls (NYSE: JCI  ) .

Weed "the worst" out of your portfolio
Intangibles add art to the science of investing. Even though such factors' very nature makes them difficult for investors to quantify, elements like customer goodwill can still make a measurable difference in a company's success in the marketplace.

When it comes to superlative stocks, investors should try to weigh customer satisfaction and other "softer" statistics to find the best prospects for their portfolios -- and avoid the worst.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Berkshire Hathaway is a Motley Fool Inside Value recommendation and a Motley Fool Stock Advisor pick. The Fool owns shares of Bank of America, Berkshire Hathaway, and Transocean, and through a separate account in its Rising Star portfolios, it also has a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 25, 2011, at 10:50 PM, adamlogan313 wrote:

    Thanks. I was unaware of the Worst Company In America competition.

  • Report this Comment On April 27, 2011, at 1:11 PM, matthew2219 wrote:

    I agree that customer satisfaction is an important factor in stock picking but BP sells a product that no one can do without. Yes, you can buy other energy stocks but not at the distressed price the villains of your piece command.

  • Report this Comment On May 07, 2011, at 5:01 PM, thidmark wrote:

    "Last year's top company in Harris Interactive's Reputation Quotient survey was Berkshire Hathaway (NYSE: BRK-B )"

    How's that working out?

    Also, I would much rather do business with BP than AOL or Time Warner.

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