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The Nuts and Bolts of CAPS

You've read the company's financial statements, scoured stacks of Wall Street analyst reports, and run a discounted cash flow model of the stock you're about to buy. But before you log on to your brokerage account to make that investment, there's one more place you must stop first: Motley Fool CAPS.

Gonna get myself connected
Home to more than 105,000 investors, the Motley Fool CAPS community is where investors rate their favorite (or least favorite) stocks to either "outperform" or "underperform" the market going forward. Based on the community's calls and the performance of the players making the calls, stocks are rated from one (lowest) to five stars (highest).

Not only that, but the players themselves are also rated based on the accuracy and success of their picks.

In the first year for which we have data, five-star rated stocks have been shown to outperform the market and, conversely, one-star stocks have lagged the market.

Great! Where do I start?
To help you better find promising stocks, we've recently added the CAPS screener, which allows investors to search for stocks using criteria like number of CAPS stars, return on equity, revenue growth, and dividend yield, among others.

Once you have a list of good stocks to research, either from your own efforts or through the screen, you can see what CAPS investors are saying on each stock's CAPS page. Here, we show the "pitches" -- what investors have written to explain why they chose outperform or underperform, how many players (including our All-Stars) have called out- or underperform, and some basic stock and company information.

Regarding the pitches, some players use qualitative reasons for their picks (for example: "Netflix is a great way to rent movies"), and others include more high-level valuation methods. These pitches can help you make better investment decisions because they expose you to characteristics about a company that you may not have recognized or known by yourself. 

For example, on the Starbucks' CAPS page, you can read a former barista's opinion of Howard Schultz's return to the company. On another CAPS page, a registered nurse voices her contempt of a medical software company's applications and inability to keep up with the fast pace of the ER. Such firsthand information is stuff you won't find in a company's 10-K. Peter Lynch would have loved it!

You can learn a lot from a blogger
The CAPS blog is a forum for investors to voice their opinions about everything from the Federal Reserve, to China, to Saved by the Bell reruns. I'm sure some will love to read 500 words on "How to Get the Zack Morris Look," but the more popular CAPS blogs tend to stick to investing. Some of them, in fact, are more detailed and written more sharply than many Wall Street reports.

One superior CAPS blogger, who goes by the handle floridabuilder, currently holds the title of "Most Recommended Blogger." floridabuilder's "Builder Alert" blog series closely covers the housing market and the construction companies that have suffered from the deflating housing bubble. If you have any thoughts about adding a home building stock to your portfolio, floridabuilder's blog is required reading.

Follow the leaders
As I mentioned earlier, CAPS investors are also ranked based on their correct and incorrect calls. Using CAPS' Top 10 Lists, you can easily search for the top investors in the community. Right now, three players are tied for the coveted "Top Fool" spot. Amazingly, all three investors have made correct calls over 80% of the time and racked up more than 5,000 points of market outperformance. Take that, efficient market theory.

If following individual investors isn't your thing, you can use CAPS to track Wall Street analyst picks. Wall Street players are tracked by SEC filings,, and talk show or magazine recommendations. Presently, the top Wall Street stock picker is Ken Heebner at CGM Capital Development, with 71% accuracy and more than 2,000 points of market outperformance.

Stupid human tricks
Additionally, CAPS has a "tags" feature that slices and dices the world of stocks into more than 800 segments. These groupings range from the amusing "Ticker is a Noun" to more serious-sounding sectors such as "Nickel" and "Fertilizer." Another fun aspect of tags is tracking stocks headquartered in your state or city.

For example, a CAPS user-chosen group of Phoenix-based stocks is up over 45% this year, while a similar Philadelphia-based group is down more than 26%. Someone in Philly undoubtedly owes a Phoenician investor a cheesesteak for that drubbing.

Eat, drink, and be Foolish
Finally, CAPS can be a tool for investors who just want to have fun with stock picking. After all, we created CAPS to be more than a place for investors to help investors beat the market, but also to make investing fun.

At the time of publication, Starbucks and Netflix were both recommendations of Motley Fool Stock Advisor, and Starbucks was also a choice of Inside Value. The Motley Fool owned shares of Starbucks.

Todd Wenning had no position in any company mentioned. The Fool has a strict disclosure policy.

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