In the wake of the scandals that ruined investments in Enron and WorldCom, and the options backdating fiasco, "corporate governance" became the catchphrase of the new millennium, and a whole cottage industry of ratings management was born.
Some evidence supports the notion that those companies with stronger governance have lower risk, increased profitability, and higher valuations. Which means companies with poor corporate governance could be targeted by shareholder activists, hedge funds, or short-sellers. In short, they could be ripe for a fall.
Below, we look at stocks that are marked to underperform the market by investors on Motley Fool CAPS, but sport above-average corporate governance quotients (CGQs). Developed by proxy service Institutional Shareholder Services, a company's CGQ measures how well it performs in up to 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 |
Index CGQ |
Industry CGQ | |
|---|---|---|---|
|
Advanced Micro Devices (NYSE:AMD) |
** |
97.5% |
98.7% |
|
Continental Airlines (NYSE:CAL) |
* |
90.1% |
79.5% |
|
ImClone (NASDAQ:IMCL) |
** |
73.8% |
80.2% |
|
Motorola (NYSE:MOT) |
** |
86.3% |
99% |
|
US Airways (NYSE:LCC) |
* |
92.4% |
84.3% |
Sources: Yahoo! Finance, Motley Fool CAPS.
Although there are many factors that an investor should consider before buying a stock, how well it treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.
Short circuit
Chip maker Intel (NASDAQ:INTC) announced Wednesday that the industry is "significantly weaker than expected" while shaving about $1 billion from its revenue forecast for the fourth quarter. This doesn't bode well for rival Advanced Micro Devices, which has had problems of its own. Amid a slew of negativity surrounding the company since 2006, CAPS member vladus2000 believes it may be reaching a turning point.
They are nearing the point of maximum pessimism. I don't see this company failing completely, barring a buy out or complete collapse, I expect this one to turn around in a few years.
In the clouds
As oil prices began declining in the summer, airline stock prices rose. Moreover, with the cost-saving programs and fees airlines introduced, not to mention the capacity cuts, the potential for Continental, US Airways, and others to actually improve financially seems all the more plausible. Even with Northwest Airlines merging with Delta (NYSE:DAL) two weeks ago, CAPS member SwordAgain suggests that macroeconomic conditions will continue to hurt Continental.
Fuel prices have come down but the company has hedges at higher prices. Effect of declining bookings due to macro conditions will pressure stock. Costs of financing likely to rise.
A Foolish quotient
There are many factors that go into whether a stock is a buy or a sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Head over to CAPS today and share your thoughts with other investor analysts on whether you think these stocks make the grade.
