In the wake of the scandals that ruined investors in Enron and WorldCom and the options-backdating fiasco, "corporate governance" became the watch-phrase of the new millennium, and a whole cottage industry of rating management was born.
Some evidence supports the notion that those with stronger governance have lower risk, increased profitability, and higher valuations. That means companies with poor corporate governance could become a target of shareholder activists, hedge funds, or short-sellers. In short, they could be ripe for a fall.
Below, we look at stocks that investors on Motley Fool CAPS have marked to underperform the market but that 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 related stocks I'm highlighting today:
|
Company |
CAPS Rating (Out of 5) |
Index CGQ |
Industry CGQ |
|---|---|---|---|
|
AK Steel (NYSE:AKS) |
** |
72.9% |
92.8% |
|
Ryland Group |
* |
57.7% |
86.2% |
|
Safeway (NYSE:SWY) |
** |
91.7% |
100.0% |
|
Bank of New York Mellon (NYSE:BK) |
** |
70.4% |
94.4% |
|
Prudential (NYSE:PRU) |
** |
65.2% |
88.7% |
Sources: Yahoo! Finance, Motley Fool CAPS.
Although an investor should consider many factors before buying a stock, how well it treats shareholders should not 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.
Steely-eyed precision
Crumbling like a rusted steel pier, the share prices of AK Steel, Nucor (NYSE:NUE), Arcelor Mittal, and the rest of the steel industry have tumbled down into the abyss since the markets -- both equities and commodities -- began their meltdown in earnest in midsummer. AK Steel has been one of the hardest hit; its shares are off by more than 80% since July. At 2.5 times earnings, it trades at a discount to all of its rivals, except for Mittal, which has had almost as nearly a disastrous run as AK.
CAPS member MShekht admits that AK Steel has been roughed up pretty badly and that Nucor may ultimately be the superior company, but there also comes a time when a stock is just priced too cheaply to ignore.
Beaten to bloody pulp. … In a longer run, the company is a bit sensitive to a downturn, so no miracles there, [Nucor] is a better stock, better company. That said, love this stock at this price level.
Bank on it
When the Treasury Department began doling out some of that taxpayer largesse to various financial institutions the other day, Bank of New York Mellon got only a few stray breadcrumbs. Of the $125 billion the Treasury invested in nine leading banks, it bought only $3 billion worth of preferred shares from BNY, a comparative pittance in relation to the $25 billion each bestowed on JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Citigroup. CAPS member CashLaundry says that because BNY has avoided much of the subprime-mortgage mess, it's a better investment: "[G]reat mgmt, low exposure to all the banking problems, hedge funds & private [equity] moving to banks like bny for custody services. Still room for [Bank of New York Mellon] to make cuts after mellon merger which will save more $ in the future."
An insurance policy
When everything has been beaten down, looking at a company's growth prospects in relation to its earnings potential may be a good way to identify a winning investment. CAPS member KenN513 looked at Prudential's PEG ratio early this month and decided it was too cheap to pass up.
This is a PEG play. [Trailing-12-month] earnings were $5.20. … With five year estimates at 14%, PEG is 0.5.
All financial services companies are beaten way down. … This price hasn't been seen since early '05.
A Foolish quotient
Many factors figure 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.
