Do These Stocks Deserve Your Support?

Editor's note: An earlier version of this article incorrectly identified the source of Exubera. This has been corrected. The Fool regrets the error.

In the wake of the scandals that ruined investors in Enron and WorldCom, as well as the 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 companies with poor corporate governance could become targets of shareholder activists, hedge funds, or short-sellers. In short, they could be ripe for a fall.

Below, we look at stocks that Motley Fool CAPS investors have marked to underperform the market (by giving them one or two stars out of five) but that 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 an investor should consider many factors 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 relative to their shareholder policies.

Down but not out
No doubt, the folks at Hexion Specialty Chemicals were biting their tongues as they announced how pleased they were to get FTC approval for their merger with Huntsman. After all, they've spent the better part of this year trying to back out of the $10.4 billion offer, including net debt, and came to the table only because a judge ordered them to complete the transaction. The interesting twist here is that with the dearth of credit available, Hexion might not be able to finance the deal -- so one possibility is that Huntsman might end up acquiring a fair portion of Hexion, instead.

Regardless of which company ultimately acquires which, CAPS member GreekMalakas figures that even in the short term, Huntsman's a lock because of the $28 buyout price.

Trading at 12 is a steal. Hexion tried to weasel out. Court slammed it in their face. Hexion will be forced to honor merger for $28.

Meanwhile, the race to find more effective treatments for diabetes has a number of biotechs and pharmaceuticals offering therapies that seem to hold promise but occasionally show results that are even worse than the disease they're fighting. Pfizer (NYSE: PFE) ran into that situation with Exubera from Nektar Therapeutics (Nasdaq: NKTR) and stopped marketing it, after observing lung cancer in several patients. Amylin Pharmaceuticals seems to be going through a similar crisis, after a handful of patients developed pancreatitis and died while taking its Byetta diabetes-fighting drug. Yet some tests show that new formulations might be better at controlling blood-sugar levels. This has CAPS member biopharminvestor seeing the market's reaction to news reports as overwrought:

Overreaction to the pancreatitis deaths (6). Diabetes space was hammered starting with Exubera withdrawal and other insulin or [orphan drug]'s (perceived) safety problems. When this passes, the diabetes space will be more fairly valued. A huge growing epidemic that is poorly served by existing treatments.

A Foolish quotient
There are many factors that go into whether a stock is a buy or sell, so it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made -- all from a stock's CAPS page. Head over to CAPS today, and share your thoughts with other investor analysts on whether you think these stocks make the grade.

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