Investor sentiment can be a powerful force in moving stocks. Think of it as a pendulum swinging in a company's favor. When investors begin to think highly of your company, it might be a sign that the stock will also start heading in the right direction.
Yet knowing when investors are beginning to warm up to a stock isn't always easy. Often, you can only tell after the stock has moved up -- but by then, it may be too late.
An astrolabe for investors
Investors at Motley Fool CAPS, however, have a way to monitor the progress of investor sentiment. Like every player at CAPS, each stock is given a rating from one to five stars, with five being the best. While the full "secret sauce" of how the ratings are calculated is proprietary, there are three factors that influence a stock's star rating:
- Whether a stock is rated "outperform" or "underperform"
- The length of time it is expected to perform (a few months or a few years)
- The ratings of the investors who make the picks.
Like astronomers scanning the skies, investors can then track the movement of the stars. A stock's CAPS rating trend shows how investors feel about the stock over time, whether its star rating is on the upswing or trending down.
Investors can then use this information to help decide whether it may be a good time to invest in the stock. Here we're looking at low-rated stocks -- companies who had the lowest one-star rating -- that have recently seen their ratings rise to two stars. Below is a table listing some of the better known stocks that have seen the stars start to align for them.
|
Company |
CAPS Rating |
Recent Price |
1-Year Return |
|---|---|---|---|
|
Sirius Satellite Radio |
** |
$3.34 |
(15.8%) |
|
Crocs |
** |
$57.14 |
279.6% |
|
Dendreon |
** |
$8.11 |
76.6% |
|
Google |
** |
$541.54 |
33.7% |
|
Nortel Networks |
** |
$16.90 |
(26.8%) |
|
Fannie Mae |
** |
$64.52 |
15.9% |
Obviously this is not a list of stocks to buy, but rather a starting point for further research. Consider these two examples. Sirius saw its star rating improve in August, just as its share price began to rise, seemingly underscoring the usefulness of watching the CAPS trend. However, although Research in Motion
Does that negate the value of this strategy? Not at all! While the Blackberry maker did make a big jump at the end of June, rising from about $55 a share to the mid-$70s in July, it gave back some of its share appreciation the following month, just as CAPS investors were getting interested. In August the stock surged again, rising to a high of $88 a share, approximately a 33% increase in just one month. So it can still pay to keep your eyes on the stars.
Networking for profits
Internet backbone company Nortel Networks looks like it might be one to benefit from a change in investor sentiment. With its stock trading at half the price of the highs it reached earlier this year, more than two-thirds of the investors who have rated Nortel believe it will outperform the market.
CAPS player JonBeer believes that the investments the company has made in R&D will eventually pay off.
The ongoing and massive capex spending by the wireless, wireline and cable companies will benefit NT and CSCO disproportionately over the next few years. 4G is just starting to be introduced and there's an enormous growth in data transmission coming. These guys are going to do well.
That's not to minimize the significant challenges facing the company. CAPS All-Star Bear TomFrog believes there's still too much in the way of viable competition for Nortel to make a move.
Nortel has to execute perfectly in the VoIP space to outperform --they've lost their market leadership in the telco space. The merger of Alcatel and Lucent makes NT a marginal player.
But now there's a new management team in place, and the company is finally getting its financial house in order. Although the stock is down and rivals are vying for position, Nortel might be able to get its groove back if those investments pay off.
Shine your starlight
We've gotten the bull and bear positions, but we haven't yet heard from you. Every investor's opinion counts at Motley Fool CAPS. Weighing in with your take could be the difference between these stocks becoming shooting stars or supernovas. It's free to sign up and free to post your thoughts; why not use this opportunity to take your star turn?
