An investor’s first instinct is to prefer successful companies. The boss is revered, the stock is a rocket. General Electric was, in Jack Welch’s heyday, a prime example.

I have a contrary strategy: Buy shares of crappy companies. Look for a business whose stock has gone nowhere and whose corner office is covered with a thick layer of dust.

If you buy cheaply and patiently, you could get a nice windfall via a takeover. Even without such a rescue you could see a decent return. Perhaps the third-rate management gets replaced with second-rate management.

Canadian Pacific was a mediocre railroad when a fund run by William Ackman acquired a position. Ackman is a hands-on investor–perhaps we should say, hands-on-throat. He got the chief executive axed. In the three years since Ackman started making a stink, the stock has tripled.

I have a little list of companies that could benefit from some cage-rattling. Over the past decade their stocks have, according to Morningstar’s calculation of total return, lagged both the market and the average for industry peers. They have underexploited assets and complacent managers.

SCHOLASTIC (SCHL, 35) has a commanding presence in publishing for young readers, both in and out of schoolrooms. When you look at its bottom line, though, what you see is what could have been. As publisher of the Harry Potter and Hunger Games novels, it could have had a nice piece of the movies. Somehow those opportunities slipped between its fingers. Instead it sank money into a movie based on another children’s fantasy series. The Golden Compass came out in 2007, and we’re still waiting for the sequel.

Scholastic Chief Executive Richard Robinson has been with the company (which his father founded) since 1962. He has a good grip on his job, what with supervoting shares that give Robinson heirs control of the board. But maybe his relatives, or an outside investor, could persuade him that everyone would be enriched if he moved on.

TOOTSIE ROLL INDUSTRIES (TR, 29) is sitting on valuable candy brands, including Junior Mints and Charms. For the past half-century Melvin Gordon has been firmly in control. Someone might delicately suggest that it’s not too soon for him to retire (age in last proxy: 94).

….continue reading stocks 3-6 HERE