Low-Rated Stocks That Deserve Your Support

In the wake of the scandals that ruined investors in Enron and WorldCom, as well as the stock-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 that 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:

 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 on the merits of their shareholder policies.

A safe deposit
It may have been only the intervention of the Fed and the Treasury that stopped the slide in financial stocks, but that's not going to be what saves Wachovia, Lehman Brothers (NYSE:LEH), or Merrill Lynch (NYSE:MER). Although they might look like white knights, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson are abrogating the free rein of financial institutions while considering greater regulatory oversight.

CAPS member thestockstalker identified short-selling as something that might doom Wachovia's stock. While the ban on naked short-selling several financials was extended for another 10 days, that's a stop-gap measure that can only go on for so long:

Ban on short selling certain financial stocks is scheduled to be lifted before trading begins tomorrow. I don't believe financial stocks are out of the water yet, and I foresee speculators short selling in bulk tomorrow. Even the stocks that are not affected directly will be indirectly affected due to the financial sector taking a hit. Watch for a big drop tomorrow and in the coming days ...

Taking flight from reality
The airlines have called upon fliers to join them in thwarting oil speculators who are bringing the industry to its knees. In basketball, they call that a head fake. Magicians use a similar tactic, diverting the audience's attention from their hands to conceal what they’re really doing.

High oil prices are not the cause of the industry's malaise; airlines have failed when there was cheaper oil. UAL, for example, defaulted on its pensions and entered bankruptcy back when oil was only $40 or $50 a barrel. AMR was at bankruptcy's door back in 2003, when oil was just $30.

Yet with the capacity cuts that are scheduled, oil prices easing up without any action against "speculators," and massive job cuts, airlines may survive to fly once again. That makes an attractive option for some investors, like top-rated CAPS All-Star member EnochRoot, who has put UAL in his basket of airline plays:

Huge capacity cuts are coming one way or another. In this basket trade I am fully expecting at least 2 90% losses, but believe they will be more than overcome from the upside to the survivors. If, as I suspect, oil and jet fuel spreads give up a moderate portion of their current levels, the upside is quite large for the whole basket of airlines and the 1 or 2 expected bankruptcies may actually be avoided.

The skies don't seem so friendly to CAPS member xKaptainx, who thinks the first sign of turbulence will send shares of AMR tumbling:

I don’t see the high prices of oil going away ... which means the long-term profitability of this company is still crappy. Oil may drop until that first hurricane comes ashore in the U.S. ... however when it does those oil prices will jump back up on the speculators which will drive this stock back down. Don’t underestimate Mother Nature!

A Foolish quotient
There are many factors that go into determining whether a stock is a buy or sell, not least of which is your opinion. Head over to CAPS today and share your thoughts with other investor analysts on whether you think these stocks make the grade.