Low-Rated Stocks That Deserve Your Support

In the wake of the scandals that ruined investors in Enron and WorldCom and the options-backdating fiasco, "corporate governance" became the watch phrase of the new millennium. One result was the Sarbanes-Oxley Act, a tough, costly, and -- some argue -- overly burdensome means of keeping a closer eye on corporate management.

A lot of water has passed under the bridge since then. While "corporate governance" doesn't excite investors the way it once did, keeping tabs on the risks our companies and their boards pose is still a worthwhile pursuit. Shareholder activists, hedge funds, or short-sellers could target companies with poor corporate governance, because those companies could be ripe for a fall. Some evidence supports the notion that those with stronger governance have lower risk, increased profitability, and higher valuations.

Below, we'll be looking at stocks that have been marked to underperform the market by investors on Motley Fool CAPS, but which have above average Corporate Governance Quotients (CGQs). A development of proxy service Institutional Shareholder Services -- you might have run across the group when it weighs in with opinions on corporate mergers -- 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.

A safe deposit
It may have only been the intervention of the Federal Reserve and the Treasury that stopped the slide in financial stocks earlier this month, but that's not going to be what saves Bank of America, Citigroup (NYSE:C), or JPMorgan Chase (NYSE:JPM). That move was simply a matter of Messrs. Bernanke and Paulson sticking their fingers in the dike.

However, this will probably do nothing to solve the underlying causes of why the financial system is so fragile. That's only going to come from within. The show of confidence that Bank of America, a Motley Fool Income Investor recommendation, displayed the other day in announcing a 75-million-share buyback, along with the approval of its regular $0.64-per-share dividend, indicates that management is confident in its soundness. Bank losses, after all, may not be as bad as some think. CAPS member stockhaven sees Bank of America's financial situation as quite sturdy:

Largest US retail bank and second largest by assets. Significantly beat analyst estimates & profit nearly tripled from the first quarter as write-downs tied to disrupted capital markets fell by more than half. ... [The bank's] Tier-1 capital ratio rose to 8.25 percent from the first quarter's 7.51 percent. 6 percent signals a "well-capitalized" bank. Hefty dividend yield of 7.7%.

Capping it off
While the lawyers were undoubtedly scrambling for a rewrite, Capstone Turbine's CEO may have inadvertently let slip some internal beliefs at the maker of microturbines that normally wouldn't get out. In an interview with Bloomberg, CEO Darren Jamison is quoted as saying that $50 million in sales was "very obtainable and reasonable" this fiscal year and that profitability by 2012 was a "reasonable date." That suggests a 60% increase in sales this year, a hefty jolt to production, which has averaged 23% compounded growth in revenue over the past five years.

Even as Capstone hurriedly put out a press release saying that it doesn't publicly disclose internal financial projections, that's really like trying to put the toothpaste back in the tube. Wind power needs to be given its due, and CAPS member rvood finds that the wide array of industries that could implement a microturbine solution makes Capstone a winning investment: "Microturbines to power all areas, commercial, personal, various business uses ... oil, marine, cars, wind ... serves US and overseas, new orders and a record backlog."

A Foolish quotient
Many factors go into 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.