Do These Stocks Deserve Your Support?

In the wake of the options backdating fiasco and scandals that ruined investors in Enron and WorldCom, "corporate governance" became the catchphrase of the new millennium and a cottage industry based on rating management was born.

Some evidence supports the notion that those companies with stronger governance have lower risk, increased profitability, and higher valuations. Which means 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:

Company

CAPS Rating

Index CGQ

Industry CGQ

Office Depot (NYSE: ODP  )

**

56.8%

88.0%

Regions Financial (NYSE: RF  )

**

51.6%

96.8%

Savient Pharmaceuticals (Nasdaq: SVNT  )

**

93.9%

98.1%

Sun Microsystems (Nasdaq: JAVA  )

**

99.8%

100.0%

SunTrust Banks (NYSE: STI  )

*

50.1%

96.3%

Source: 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 relative to their shareholder policies.

Searching for answers
Two companies received an end-of-year gift when the Food and Drug Administration decided to speed up its process for making a decision about their therapies. Savient Pharmaceuticals won a rapid review of its orphan drug pegloticase to treat gout, while Northfield Labs and its blood-cell-substitute therapy will go under the microscope faster. Such reviews can take as long as a year, but the FDA has said it will render judgment within six months. Savient says the target date for pegloticase is April 30.

Back in November, CAPS member truthiac predicted that Savient would benefit from good news, overcoming the damage caused by skewed data that seemed to show some harmful side effects from its gout therapy.

After a major gap down on false rumors, the gap is likely to fill in the coming months, especially in view of the expected positive news flow in December-January.

Reading tea leaves
Sun Microsystems has its head in the clouds -- cloud computing, that is. It announced it was buying privately held Q-Layer, a maker of data center modeling and management software that automates cloud computing and simplifies data center management. While it has been challenging VMware (NYSE: VMW  ) , which was spun off from EMC (NYSE: EMC  ) last year, in the virtualization market, some investors don't think it's enough. CAPS All-Star lanceur says that without a dominant product, there's no way for it to stand out.

Sun has good products (Java, Solaris, hardware, we'll see about JavaFX), but they're not really in a position to really benefit from them in part because none of them really dominate the competition. Their move to open source the Java and Solaris shows that they're getting a bit desperate. I think that the coming slump is likely going to hit them harder than most.

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. Share your thoughts with other members on whether you think these stocks make the grade. 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. VMware is a Motley Fool Rule Breakers pick. The Fool has a disclosure policy.


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