Top-Rated Stocks That Get Low Grades

The flipside of 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.

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

Finding good companies, and holding them for the long term, is one of the greatest secrets to investing. But there are many factors an investor should consider when weighing a company's merits, 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.

Sound off
Wireless software developer Smith Micro posted 53% higher sales in the latest quarter, but profits on both a GAAP and non-GAAP basis fell year over year. The company reiterated its solid outlook for the rest of the year, but that didn't seem to hearten investors much. Wall Street sent shares sharply lower, though they rebounded higher in the days following the news. Investors' concerns seem legitimate, since the company remains largely dependent on its largest customer, Verizon (NYSE:VZ).

The shares' volatility puzzles CAPS member topjimmy23, who foresees the company trending lower in the future:

I do not understand this price action... has anybody actually signed up for the $14 per rhapsody music download service?! [Smith Micro Software] is now bundled with rhapsody. Yes, management is very good at beating their estimates, but their estimates are going to trend lower.

Injecting some common sense
Specialty pharmaceutical ViroPharma caused considerable consternation among investors when it decided to purchase Lev Pharmaceuticals for its ultra-orphan drug Cinryze, a treatment to prevent flareups of a very rare genetic inflammatory disorder. However, since Vancocin is the only commercial success it fully owns, ViroPharma will need to expand its portfolio, even if that means acquiring drugs that still endure the FDA's skepticism.

CAPS member zzlangerhans thinks it was a shrewd maneuver, though, since ViroPharma gets the drug at a discounted valuation:

I like the Lev deal since I think it Cinryze is going to get approved and Viropharm got a fair if not fire sale price for the company. Marabivir phase III results could also represent a significant near term positive catalyst.

Judging by ViroPharma's rebounding share price, it seems the market's had similar second thoughts.

Designer wear
Semiconductor designer Anadigics has been going through some market mood swings of its own. After peaking at $13.54 back in early June, the stock has swooned. Cutting guidance last week didn't help the company any. Yet the falling price has prompted some CAPS players to upgrade the stock. RF chip-making peers like RF Micro Devices (NASDAQ:RFMD) and TriQuint have been faring better, while demand for Anadigics chips have slowed. In the long run, these companies have leading customers growing at double-digit growth rates, and the convergence of video, voice, and data markets ought to eventually lead to future growth.

CAPS member Gemini846 agrees that new cell phones' arrival on the market should push the chip maker higher: "Tech-Semis: I know wireless has been beat down right now, but with all the new phones coming out I don't see how I could be wrong on these guys 5 times."

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.