The flip side to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests. Conversely, there are top-flight companies that also treat their shareholders with respect.
Institutional Shareholder Services -- the big name in corporate proxies -- 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. It assigns the stocks a rating that it calls its corporate governance quotient, or CGQ.
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 and that also sport above-average CGQ scores, either in their index group or among industry peers.
| Company | CAPS Rating (Out of 5) | Index CGQ Ranking* | Industry CGQ Ranking* |
|---|---|---|---|
| Automatic Data Processing (NYSE: ADP) | **** | 76.5% | 97.7% |
| Harris & Harris (Nasdaq: TINY) | ***** | 84.1% | 76.2% |
| Level 3 Communications (Nasdaq: LVLT) | **** | 93.8% | 94.7% |
| USEC (NYSE: USU) | ***** | 86.5% | 78.7% |
| Vaalco Energy (NYSE: EGY) | ***** | 67.9% | 67.0% |
Sources: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared with companies in index or industry. Higher is better.
Although finding good companies and holding them for the long term is one of the greatest secrets to success in investing, there are many factors an investor should consider, and how well a company 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.
Go to the head of the class
The green-shoots economy continues to wilt in the summer sun, but like crocuses breaching the last winter snows, there do remain some signs of life. Ah, poetry ...
According to the National Venture Capital Association, five companies backed by venture capital went public in the second quarter and raised a total of $720 million. At $279 million, satellite-imaging firm DigiGlobe (NYSE: DGI) was the largest. That's small during normal times, but considering there had been no debutantes over the previous two quarters, it was something of a milestone. Further, there were 59 venture-backed mergers in the quarter, with Medtronic's (NYSE: MDT) $700 million acquisition of Corevalve topping the list.
That development offers hope to the capital markets, although Dow Jones notes that 51 venture-capital firms raised only $5.1 billion over the first six months of 2009. That was a 63% drop-off from a year ago and the worst outing since 2003. Consequently, according to the Wall Street Journal, some VC investors want to stick their hands in taxpayers' pockets and grab some of the stimulus money that Washington has been throwing around. The U.S. government has promised about $60 billion for four key areas -- environmentally clean technology, rural Internet broadband, cyber-security, and health-care information technology -- in which venture capital has invested heavily.
Yet some start-ups are attracting great interest: Former Netscape whiz kid Marc Andreessen was able to lure $300 million in capital and even oversubscribed his new venture-capital firm, which will focus on the computer industry. Perhaps that action indicates that there's plenty of interest left in technology.
Harris & Harris certainly thinks so. It's a business-development company that invests exclusively in venture-capital-backed tiny tech: nanotechnology, microsystems, and microelectromechanical systems (MEMS). Its portfolio is valued at almost $59 million, and it has another $51 million in U.S. Treasuries at its disposal. With no debt on its books, it's not in any danger of facing a liquidity crisis even in this recession. In fact, it's poised to find the next big thing.
Investors such as top-rated CAPS All-Star member TSIF are looking at the potential of seeing Harris' investments eventually paying off when they're finally brought public:
Harris and Harris's Tiny has been a favorite of mine for a long time. I hold some hoping they will take off some day, even years from now. Investing in tiny techs is a tough proposition in any economy, but the lack of funding has made it hard for even the better tiny's to grow. While funding is still tight, Harris and Harris has some nice plays in their stable. If any of them soar then Harris and Harris will gain in bounds. Harris and Harris, however, is savvy enough to keep enough cash on hand to help the better ones along and to be open to new positions.
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