Top-Rated Stocks That Get Low Grades

The flipside to shareholder-friendly stocks expected to underperform the market? Highfliers that pay little heed to their owners' interests.

We've already looked at low-rated stocks that may deserve investor support, having earned high Corporate Governance Quotients (CGQ) from Institutional Shareholder Services -- the big name in corporate proxies. But today we'll look at otherwise top-notch companies that may do their shareholders a disservice.

ISS measures how well a company performs in as many as 63 categories and covers four broad areas. Moreover, each company is scored relative to its market index and its industry group. Some evidence supports the notion that companies with weaker governance have higher risk, decreased profitability, and lower valuations. We'll be looking at stocks that Motley Fool CAPS investors have marked to outperform the market, but which sport below-average CGQ scores, either in their index group or among industry peers.

Sources: Yahoo! Finance, Motley Fool CAPS.
*Relative placement when compared to companies in index or industry. Higher is better.

Finding good companies and holding them for the long term is one of the greatest secrets to investing. There are many factors that an investor should consider when researching whether a company is good, and 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.

A green patina
The gut check of the commodities' market free fall this past month has investors questioning whether there is still room to run. Copper miners Freeport-McMoRan, which owns the world's single largest recoverable deposits of copper and gold, and Southern Copper (NYSE:PCU), for example, have fallen 25% or more since the beginning of July. Yet the case for copper remains bullish and Freeport's CEO has suggested that "the world is going to need all the copper that we can find and produce."

If that's the case, then the expectations that CAPS member pjani06 penned last week regarding Freeport-McMoRan supersizing itself may very well prove prophetic:

The company can easily generate income of $5 billion the next 5 years. This should warrant a market valuation of atleast $40 billion. Today we're near $30.3billion. You hold this, get paid sweet dividends in the meanwhile the company will hit & surpass the $40 billion market cap mark.

The only thing that can stop this company from doing that is a complete buckle and crash in metal commodities in dollar prices. That would require an EXTREME upswing in the value of our dollar.

Coal bin of history
Coal is another commodity that has caused a shock among its miners' shares. The Market Vectors Coal ETF is down more than 25% since July with Peabody Energy and Arch Coal (NYSE:ACI) off more than 30% in the same time span. To understand how jumpy investors are in this market, consider that Peabody reported doubled earnings on 43% higher revenue, far outstripping analyst expectations. It even raised guidance for the year but still saw its stock drop almost 4% on the news.

Last month, CAPS member SapphireSeas recommended that investors consider the big picture to understand why Peabody will thrive:

Yes, P/E = 50 and double the sector average. Stats gazers need to get off the numbers and look at the sea change taking place in front of our eyes throughout the global economy.

China places approximately one new coal-fired plant into operation every WEEK. That building pace cannot last forever, of course. However, such demand will really put the crunch on worldwide supply of coal, rewarding those working the supply side business.

A Foolish quotient
Many factors go into whether a stock is a buy or sell, but do corporate-governance policies enter into your equation? Head over to CAPS today, and share your thoughts with other investor-analysts on whether these stocks ought to make the grade.