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, and a whole cottage industry of rating management was born.

Some evidence supports the notion that those companies 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:


CAPS Rating

Index CGQ

Industry CGQ

Energy Conversion Devices (NASDAQ:ENER)




First Solar (NASDAQ:FSLR)




Morgan Stanley (NYSE:MS)




National City (NYSE:NCC)




Home Depot (NYSE:HD)




 Sources: 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
Despite deriving 90% of its sales from Germany, First Solar is looking to make a big splash in the U.S. and is expanding its facility here. While its shares were recently in a tailspin, congressional action could provide a big boost to First Solar as well as Suntech Power (NYSE:STP) and the other solar companies. Congress finally extended the investment tax credit that many in the industry need to survive and thrive.

Interestingly, First Solar is generally considered one of the few solar companies that doesn't need the tax credits to move forward, but now that they're in place, it ought to help move solar energy to the next phase. Not everyone is convinced, however. CAPS member neumann101 finds most solar companies still overvalued, and thinks they have a ways to fall before they become attractively valued:

All the momentum plays of the last few years will be taken down to a P/E of 10. After that, analysts will recalculate earnings estimates and find that many companies are unwilling to invest in solar projects, and then European subsidies for solar power will end. And then ...

With credit markets still in a deep freeze despite governments around the globe dumping money into the system like an arsonist fueling a fire, Home Depot's shares continue to trade at some of their lowest levels of the year. Perhaps it's the fear that even if homeowners could access credit to launch a new project they wouldn't, simply because of the uncertainty surrounding the economy.

CAPS member Beacon10 figures that input costs are making any project more expensive. Worse, this member argues, Big Orange has a dim reputation in comparison to rival Lowe's (NYSE:LOW):

Lowes is a way better hardware store. Cleaner, more organized, better help. Home Depot is always a mess. Plus the housing market sucks right now. The cost of oil is outragous and that is causing the price of wood and other building materials to go up. I dont see any light at the end of this tunnel. It will be a while before the housing market starts to make a strong comeback.

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.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team invested $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

The Home Depot is a Motley Fool Inside Value pick. Suntech Power is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days.

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