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 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

AutoZone (NYSE:AZO)

*

77.5%

95.2%

Kohl's (NYSE:KSS)

**

65.9%

92.3%

Nordstrom (NYSE:JWN)

**

93.6%

98.1%

PMI Group (NYSE:PMI)

*

78.9%

96.6%

Sequenom (NASDAQ:SQNM)

**

64.1%

71.2%

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.

Searching for answers
As a maker of noninvasive prenatal diagnostic technology, Sequenom has enjoyed share prices that have bucked the market's implosion and handsomely rewarded shareholders. Shares have doubled off their most recent lows back in November, and the biotech attempted to use its stock as currency in a hostile bid for colon cancer test maker Exact Sciences (NASDAQ:EXAS). Even with Sequenom's $41 million offer rejected, investors have shown no desire to reprice its shares downward.

That doesn't concern CAPS member letsgosfg who finds Sequenom's product line a cradle of potential blockbusters, which, if they catch on, would justify its lofty price: "Great potential for upcoming products to become blockbusters from a company with a small market cap could lead to staggering returns is the share price."

Yet others like top-rated All-Star CAPS member Troy2008 remain concerned that it has simply gotten too far ahead of itself.

[Sequenom] is way overpriced for a company that is cash flow negative (negative P/E) and will not have it's product on the market for many months. Seems a good short at high 20s range. Should be mid to low teens in this market crash.

Is it time?
With an auto industry headed for the junkyard and at a time when the economic car wreck is leaving rivals like Pep Boys (NYSE:PBY) up on blocks, a number of investors view auto parts retailer AutoZone as potentially being on its deathbed. CAPS All-Star midas784 says even if you overlook the macro trends in place, AutoZone's financial health leaves a lot to be desired.

USD is going to soon lose the reserve currency status, will have a severe correction, Oil will go through the roof once again and will kill the US Auto sector. People will go back to basics, drive less, live closer to work, use public transportation. That should have a severe impact on car sales, car needs and indirectly on Auto parts.

Plus how can you ignore the massive debt (2 billion) and a huge 2 billions in accounts payable. Sooner or later they will have a huge inventory markdown and will be forced to take on more debt to pay its supplier.

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.

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Fool contributor Rich Duprey has no financial position in any of the stocks mentioned in this article. You can see his holdings holdings. The Motley Fool has a disclosure policy.