Do These Stocks Deserve Your Support?

In the wake of the options-backdating fiasco and the scandals that ruined investors in Enron and WorldCom, "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 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 an investor should consider many factors before buying a stock, how well the stock treats its 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.

Home deconstruction
It's a time unlike any since the Great Depression, and it appears that the housing market will get worse still before it ever gets better. Beazer Homes has completely exited some markets -- entire states, even -- and others, such as Pulte Homes (NYSE:PHM), will face a cash-generation crisis before long. CAPS member livoniarules wrote in his blog last month that debt-laden homebuilders will be burned in this market: "Any homebuilder with debt due (with barely any cash to cover) in the next two years through 2010 is toast … additionally, I am not hearing from anyone about possible capital raises for the public builders beyond what we saw 6 months ago …  the smart money is buying the debt at a discount now and taking control in bankruptcy court."

It's not any better on the office-property front. Maguire Properties just reported a wider quarterly loss after rents came in much lower as a result of selling off some office buildings. livoniarules' comments about debt could apply to commercial real estate as well, since Maguire has been struggling under a mountain of it while General Growth Properties (NYSE:GGP) is selling properties to meet its debt payments. It was back in May that top-rated CAPS All-Star jack21222 felt Maguire was not long for this world:

Five BILLION in debt with only 90 million in cash, and it's losing money. Just ended its dividend, and the CEO just bailed out.

The only upside is that 30% of its shares are already short, which represents a lot of latent buying power, since those shares will need to be covered eventually. May be risky to put real money into it for that reason. However, in the long term, I can't see this company surviving.

Ditto all that for real estate investment trust CBL & Associates, which just found it necessary to cut its dividend by a third to conserve cash. CAPS member NEWSMONKEY finds its debt load oppressive as well: "too much leverage and it must come down. I suspect they will raise capital via an equity offering."

A Foolish quotient
There are many factors that go into whether a stock is a buy or a 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.