Top-Rated Stocks That Get Low Grades

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The flipside to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests.

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 industry group. It assigns the stocks a rating that it calls a 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, but which sport below-average CGQ scores, either in their Index group or among industry peers.

Company	CAPS Rating (Max 5)	Index CGQ Ranking*	Industry CGQ Ranking*
Applied Materials (Nasdaq: AMAT)	*****	25.4%	83.1%
BE Aerospace (Nasdaq: BEAV)	****	4.8%	32.6%
Johnson & Johnson (NYSE: JNJ)	*****	44.3%	95.9%
Nucor (NYSE: NUE)	*****	27.5%	72%
Procter & Gamble (NYSE: PG)	*****	41.6%	91.9%

Source: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared to companies in index or industry. Higher is better.

Although holding good companies for the long term is one of the greatest secrets to investing, investors should consider many factors when evaluating a company. How well it treats shareholders shouldn't be least among them. Consider these rankings one way to gauge how these businesses stack up relative to their shareholder policies.

Getting detention
During times of turmoil, the "flight to quality" is a common reaction to investors. Procter & Gamble is widely considered a safety net in these times. Yet as top-rated All-Star CAPS member jstegma notes, the time to invest in quality companies is not when everyone realizes their value:

You can't have stocks that are universally accepted to outperform. Yes, it's a good company, but its just too well-liked right now. Once everyone knows a good, safe place to invest their money during a market downturn, you are going to be paying a huge premium for this perceived safety. It's a good buy if it sells off, but it should underperform at the current level.

Like many commodities, steel prices have receded, dragging steel companies like Nucor down with them. Yet as CAPS member SteelFolk points out, long-term trends still point toward high steel demand worldwide:

Strong global growth over the next 10 years will cause steel demand to outpace the growth in supply. Good for pricing in the sector. Nucor's management is very adept at identifying opportunities and will use it's large cash pile and cash flow to make accretive acquisitions and green field investments.

With solar power maintaining high interest as an alternative source of energy, CAPS member cobra78 sees semiconductor equipment maker Applied Materials benefiting from deals with solar players like Suntech Power (NYSE: STP) and LDK Solar (NYSE: LDK), which require its technological expertise:

Safe play on solar power with exciting growth. Sun tech power said that AMAT with provide them with trail product of a new more efficent Thin-film solar cells in 2009. These cells are less costly to manufacture because they do not rely on high-priced silicon. Plus they justed awarded a $220 million contract with LDK Solar. I plan on buying this stock below 20 for the next year or so and see what happens.

Airplane cabin manufacturer BE Aerospace has been dragged along with worries over the state of the U.S. airline industry, but it doesn't have much exposure here; only 15% of its backlog is tied to the United States. CAPS member Fozzy4 thinks it's just a matter of time before the market realizes its mistake:

BEAV has minimal exposure to the sinking US airline industry, solid growth history, and an ever-expanding backlog of work (~$2.4B as of the Q2 earnings report). Pessimism that has held it down from oil and US airline woes is vastly overstated, and it's soon time for BEAV to fly back to a reasonable P/E from its currently undervalued position.

A Foolish quotient
Many factors go into whether a stock is a buy or sell. Do corporate governance policies factor into your equation? Head over to CAPS today, and share your thoughts with other investor analysts on whether you think these stocks ought to make the grade.