In the wake of the scandals that ruined investors in Enron, WorldCom, and the options backdating fiasco, "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. Which means companies with poor corporate governance could be targeted by shareholder activists, hedge funds, or short-sellers. In short, no pun intended, 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:


CAPS Rating

Index CGQ

Industry CGQ

JPMorgan Chase (NYSE:JPM)




Starbucks (NASDAQ:SBUX)








Blockbuster (NYSE:BBI)




Allied Capital   (NYSE:ALD)




 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.

Down but not out
By scooping up Washington Mutual (NYSE:WM), the folks at JPMorgan Chase look like ultimate bargain-basement shoppers, getting assets of their rivals at insanely cheap prices. That's likely to make them a huge force in financial services, though buying distressed assets even at fire sale prices is not without risk.

Some of the top-ranked All-Stars in the CAPS community seem to feel that the House of Morgan is going to be a monster company when all is said and done. SmokeyJoeSmokin says that even if there is short-term volatility the end result is a company that will see higher share prices.

When all the dust settles, JPM is going to be a mammoth company. CEO is a smart guy picking up assets for pennies on the dollar. Short term will probably be a little volatile, but long term, this company's stock should be MUCH higher.

Housing issues have received something of a breather in recent days as bailout talks have raised hopes among many that taking Wall Street out of the tank will thaw the credit markets. More likely, though, it's just going to be a sucker punch, and like it or not, housing issues and those that insure them like PMI Group and MGIC Investment (NYSE:MTG) -- the nation's largest mortgage insurer -- may yet do well.

By cutting its dividend by a penny, though, PMI will help build up its capital base. CAPS member Patrick6k sees PMI as being one of the survivors when the housing market turns fruitful again.

PMI is so much more than your average insurance company. I particularly like their credit enhancement and mortgage insurance segements. The U.S. Mortgage Insurance Operations segment offers mortgage insurance products in the United States that enable borrowers to buy homes with low down-payment mortgages. Simply put, this is a well run company in a beaten down sector. The housing market will be fruitful again, and I look for PMI to be one of the survivors.

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 to share your thoughts with other investor analysts on whether you think these stocks make the grade.