In the wake of the scandals that ruined investors in Enron and WorldCom, and the options-backdating fiasco, "corporate governance" became the watchphrase 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. Conversely, 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 I'm highlighting today:


CAPS Rating

Index CGQ

Industry CGQ

Centex (NYSE:CTX)




Evergreen Energy (NYSE:EEE)








Pacific Ethanol (NASDAQ:PEIX)



64.8% (NYSE:CRM)




Source: Yahoo! Finance, Motley Fool CAPS.

An investor should consider many factors before buying a stock, including how well it treats shareholders. Consider these rankings a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Down but not out
After initial euphoria, ethanol companies have been tarred and tarnished for helping to drive up the cost of feedstock, though supporters say such charges are unfair. (We featured Verasun Energy (NYSE:VSE) here two weeks ago.) CAPS member dannp believes that ethanol's benefits outweigh any drawbacks, and thinks that Pacific Ethanol can overcome the many misconceptions surrounding the alternative fuel:

As we work to become less dependant on imported oils & fuels, the markets for other forms of renewable fuels will continue to grow. If everyone would only encourage the use of ethanol instead of fearing it on unfounded stories of it's damaging effects!!!! I often find people who really believe that using ethanol will damage their cars when what it really does it clean out the old gunk and allow it to run better and also cleaner. Of course you will find that when the gunk comes out you will possibly need a new fuel filter in the older model cars but any car with a fuel filter needs a new one occasionally.

So far, NVE has been spinning its wheels in developing its "spintronics" form of computer memory. Some observers think the stock's on its deathbed, despite its longstanding agreements with companies like Honeywell (NYSE:HON). The novelty of spintronics, which relies upon the spin of electrons to store memory, rather than those electron' charge, has fueled some uncertainty surrounding the company's future. However, CAPS member slm05k noted back in June that NVE could become huge if this developing field of physics proves feasible:

... another company around 10% off its highs at a buy point...They make a cool memory product that could become huge...They have beat earnings estimates each quarter including a big beat last quarter

Coal is the most prevalent form of energy used today, and Evergreen Energy aims to make it a cleaner source of fuel. Although its K-Fuel process lowered mercury emissions from coal during a test earlier this year, CAPS member TheParadox considers the possibility of clean, efficient, and affordable coal a pipe dream:

Lastly, anything with "coal" & "clean" is like saying "expensive" and "free" in the same sentence. Coal is the dirties source of power with soot and even with scrubbers, the main by-product of coal is the very source of the worlds problems -- CO2. "Lets bury it, we can store it, Lets make a contest to make it useful, blah blah blah"

lets just use something (like nuclear power) that doesn't even provide a source of Co2 rather than trying to figure [out] "what are we gonna do about something we can't avoid"

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.

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