Low-Rated Stocks That Deserve Your Support

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In the wake of the options backdating fiasco and the scandals that ruined investors in Enron and WorldCom, "corporate governance" became the watchword, and a cottage industry of ratings management was born.

Some evidence supports the notion that those 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
Ambac Financial (NYSE: ABK)	*	94.7%	78.3%
Capital One Financial (NYSE: COF)	*	64%	92.5%
AirTran Holdings (NYSE: AAI)	*	72.1%	88.1%
Aventine Renewable Energy (NYSE: AVR)	*	84.9%	77.7%
Radian Group (NYSE: RDN)	*	99.9%	99.5%

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 based on their shareholder policies.

A safe deposit
It's not surprising that financial companies dominate the list this week (or did last week, for that matter). These are some of the worst-performing stocks around, and the market may be right to hold Ambac or Capital One in contempt. Or, investors could be like Warren Buffett, who has been steadfastly holding onto his financials -- they make up about 30% of his holdings -- even though it may have hurt Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) performance in the short run.

Some investors in Capital One Financial feel that the company has few places to go but up. CAPS member SapphireSeas writes that the subprime crisis has bottomed out, and Capital One is positioned to capitalize on emerging opportunities.

Capital One probably still has some write-downs to take; however, the upshot is that we're in a Recession, consumers are still tapped out (and will be for a while longer), and credit card debt is set to increase. This is when credit card underwriters make money. Company is also well-positioned to take advantage of government intervention, low interest rates, and a push to refinance various types of consumer debt.

Taking flight from reality
That subprime storm, with arms that reach out to the housing, credit, and capital markets, also upended Radian Group, a credit risk management company. Last year, Radian was flying high and set to merge with mortgage insurer MGIC Investment. But the subprime mess kicked into high gear, and Radian found itself at the bottom of the heap, its buyout called off and its credit rating headed down. Shares even traded in true penny stock land, at less than $1 a stub.

Some investors understand the challenges still facing Radian's recovery, but see the turnaround taking hold. CAPS member brabby, for instance, wrote recently that Radian is making the tough decisions to stanch the bleeding.

It got taken down hard with Fannie and Freddie's meltdown, but now that the Feds have stepped in to shore up those GSEs and pump in money to [the] housing market, I think this stock is likely to rally if their 2Q results match or exceed their recent public statements. I'm not saying there aren't likely to be some difficult times ahead in mortgages, but this company looks poised to weather the storm and turn around when housing [finally] bottoms. [W]ith a P/E around 3 right now, I think this stock is cheap.

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 investors on whether you think these stocks make the grade.