The Motley Fool CAPS platform is a great way to see how our online community of investors is thinking about a particular stock and its outlook. But sometimes the ratings can seem confounding.
As a member asked in April 2015 about Netflix (Nasdaq: NFLX), one of Fooldom’s biggest winners and fan favorites, “Why does Netflix have only 2 stars when [it seems highly regarded by many measures]?”
Fool co-founder David Gardner, the patron saint of CAPS, tackled the response personally:
“A great and understandable question. This deserves a short explanation on how Motley Fool CAPS sets its ratings.
“There is a natural selection bias inherent in CAPS ratings, which we foresaw before we even began building the site: People will tend to research stocks they think will be good, they will buy the ones that ‘win’ their research efforts, they will ‘cap’ (i.e., pick that stock to outperform on Motley Fool CAPS) the stocks they buy,” David wrote. “As a result, CAPS we will almost certainly ALWAYS have more Outperform than Underperform ratings, probably significantly so. Which is OK!”
To correct for this, the CAPS platform balances every stock against every other in the battle for CAPS Star Ratings. So while Netflix looks to be quite admired by its pickers, it is in a sense less admired by its pickers (with all their ratings factored in) than about 60% of all other stocks out there (with all of their respective Player Ratings factored in).
Let the CAPS debate begin
“In particular, in our experience stocks that generate some controversy or heat — Netflix is one of those — are simply going to have enough skeptics that those skeptics inevitably weigh on the stock’s Underperform ratings — and therefore CAPS rating,” David wrote. “This seems particularly true of some Rule Breaker-style stocks.”
But fear not.
“Here’s the good news if you’re a ‘believer’ — in Netflix or any such ‘too-low-rated’ company: Pick it on CAPS and be right!,” he wrote. “As you are right, guess who’s racking up all the points, while the people on the other side of the table are taking Score hits and CAPS rating hits? Right, you are. (I’m happy to say that despite NFLX often not getting its due on CAPS, I have racked up over +2300 Score in the past 8 years on it with a single green thumb.)
“This reminds us that in the end, the chickens come home to roost — those who are right, whichever direction, will gain greater influence over the ratings.”
For more on CAPS and how it works, see: http://caps.fool.com/help.aspx