4 Signs You're Betting on a Bad Stock

A startling number of Fools believe Netflix (NAS: NFLX) founder and chief executive Reed Hastings should be fired. I'm not one of them. Neither is Fool co-founder Tom Gardner. But if you read the comments to a recent article I wrote about Hastings' leadership in the wake of an awful third-quarter performance and even worse Q4 guidance, I'm forced to question my own assumptions.

Thus the article you're reading now.

In more than a decade of investing, I've come to believe there are four things that make for a top-notch steward of shareholder capital. Here's closer look at each of them. See how you think Hastings rates after reading, and please use the comments box to single out executives that you believe either lack or fully possess these traits.

1. Engagement.
Does the CEO actively reach and respond to investors and customers? Executives who recognize who the owners are (i.e., the shareholders) and who keep the doors open and lights on (i.e., customers) are always more likely to create value than their peers are, especially in a regulated environment where the playing field is supposed to be equal. (I'll grant that recent evidence suggests that it too often isn't.)

Hastings had a history as a terrific communicator in years past. But the man who so clearly debunked the importance of Netflix's failure to re-up a deal with Liberty Starz (NAS: LSTZA) went missing when it came time to elucidate the need for a 60% price increase and a separate website and business for distributing DVDs by mail. Of all his recent failings, I see this one as Hastings' biggest.

Whom do you admire when it comes to engagement? Whom are you skeptical of? In years past I've admired Oracle (NAS: ORCL) CEO Larry Ellison's bluntness, only to lose faith recently. I've come to distrust his comments because they either seem (a) co-opted, or (b) askew with existing data. (Skewering cloud computing while at the same time holding a big stake in NetSuite (NYS: N) , for example.)

2. Transparency
Are the financial statements clear and complete? Do the CEO and management team speak frankly on conference calls? Hastings has always struck me as excellent in this regard. Even his recent apologies, though late, I find to be appropriately contrite and his promises to make good genuine.

I'll understand if this seems like the "duh!" test. Of course management should be forthright! Of course companies should issue clear and complete financial statements! But does this always happen? Um, no. You'll find all the evidence you need parked on Wall Street. Find someone with a sign. Strike up a conversation and count the number of times said protestor rightly refers to undeserved bailouts and the startling lack of jail time for executives who almost certainly deceived not only investors but also themselves and regulators.

Or if you want to save time, check out the list of current actions pursued by the Securities and Exchange Commission. Go ahead, click. I dare you.

3. Strategic vision
Do the CEO and other executives describe the plan to achieve profitable growth in a way that's understandable and reasonable? There's no other way to know what you're investing in, and what to expect in the years ahead. Investors who fail to understand the vision for the companies they're invested in are -- to put it bluntly -- buying blind. Nothing could be more dangerous.

Here, too, I think Hastings deserves some criticism. Although I don't believe he was intentionally misleading or unclear, he did such a poor job elucidating the vision for Netflix-Qwikster that smart investors can hardly be blamed for selling at the time of the announcement. What choice did they have, other than to trust that Hastings hadn't completely lost his mind?

Strategic vision is easy to confuse with great PR skill or false hope spelled out in hyperbolic quotes in puffy press releases. It is none of these things. Instead, it is the je ne sais quoi that the late Steve Jobs brought to the stage in announcing new Apple (NAS: AAPL) gear, and what shareholders will miss most now that he's gone. (No pressure there, eh, Tim Cook?)

4. Evidence
The silver bullet. When good leaders lead well, numbers follow. It's really that simple.

For most of Hastings' reign as Netflix CEO, there's been a bounty of great numbers. Revenue growth, margin expansion, subscriber growth, increasing returns on capital. Most of it went missing in Q3, but a quarter also doesn't make for a track record. Those of us who own shares will have to wait to see how Netflix performs in the New Year to fully judge the impact of a 60% price increase and any attempts to win back subscribers who've fled to Amazon.com (NAS: AMZN) , Hulu, or DISH Network (NAS: DISH) . There's nothing more we can do right now.

If there's a lesson I take from all of the hubbub -- and the apparent uprising against Hastings among common shareholders -- it's that management and good governance never stopped mattering even if I haven't been looking closely enough at the leaders I'm betting on in my portfolio.

Now it's your turn at the podium. How do you rate Hastings and the other leaders atop the companies you own? Please weigh in using the comments box below. Or if you'd prefer to lessen your dependence on great leaders while also boosting your returns, I recommend The Motley Fool's new special report on 11 top-performing dividend stocks. Get your copy now -- it's 100% free.

At the time thisarticle was published Fool contributorTim Beyersis a member of theMotley Fool Rule Breakersstock-picking team. He owned shares of Apple and Netflix at the time of publication. Check out Tim'sportfolio holdingsandFoolish writings, or connect with him onGoogle+or Twitter, where he goes by@milehighfool. You can also get his insightsdelivered directly to your RSS reader.The Motley Fool owns shares of Oracle and Apple.Motley Fool newsletter serviceshave recommended buying shares of Netflix, Amazon.com, and Apple and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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