Your Stock Just Got Tagged

At The Motley Fool, we don't usually take a "top-down" approach to picking stocks. Rather than allowing industry or macro forecasts to drive our investment decisions, we focus primarily on each company's fundamentals.

At times, though, it's certainly possible for us to single out attractive stocks by closely watching the market's prevalent trends. Great fundamentals unquestionably lead to price appreciation, but finding companies with those qualities often starts with some keen observation.

Tagged and bagged
The tagging tool found in our Motley Fool CAPS community is one great way to investigate interesting investment themes. CAPS is home to more than 4,700 rated stocks, and our tags organize those stocks into specific groups for you.

Tags range from obvious index, sector, and country classifications, to more creative categories -- businesses with "Top Brands," managements undergoing an "SEC Investigation," and even companies that have earned "Military Contracts." There are more than 600 tags in CAPS for you to explore, and you can view all of them for free right here.

A very special situation
To get you started, we'll walk you through a specific tag and touch on its underlying theme. Recently, fellow Fool Dan Caplinger wrote a great piece about corporate spinoffs, so let's take a closer look at some chips off the old stock.

Type the word "spinoff" (makes sense, right?) in the tags search box, and these are some of the stocks you'll find:

For simplicity, I've chosen some of the more highly-rated stocks to single out among the 25 that bear the "spinoff" tag. All are companies that, in 2005 or 2006, were either spun out from a parent company or were proud parents themselves.

Another cool feature of tags: They provide the returns for each category, sort of like a mini-index. For our group of spinoff stocks, the daily, 30-day, and one-year returns are:

From the chart, we can see that our samples of spinoff stocks have had a pretty sweet run over the past 52 weeks. As Foolish investors, we know that the very best way to outperform is to consciously seek out (and pounce on) Mr. Market's soft spots. Well, spinoffs are an investor's dream because, as Joel Greenblatt illustrates in the special situations classic You Can Be a Stock Market Genius, they've got a boatload of excess profits naturally built into them.

Though massive buyouts and mergers seem to be stealing all of the headlines lately, corporate spinoffs -- in which a parent sets one of its divisions free -- can actually be more beneficial to owners over time. Whether it's meant to unlock a division's true market value, pass the value of an otherwise hard-to- sell business to shareholders, or dispose of a segment in the most tax-efficient manner, the very motivation behind a spinoff is to create genuine value.

Another great thing about spinoffs is the inefficiency of the transaction itself. A spun-off segment isn't actually sold to new shareholders, but rather given to the parent company's existing ones. Because you have people receiving shares of a business they didn't necessarily ask for, it often leads to heavy initial selling pressure as the parent shareholders look to get rid of the spinoff. As a result of this quirk, an inordinate amount of spinoffs trade at steep discounts right after the transaction takes place.

Of course, that was just a brief overview of the hidden beauty of spinoffs (if you'd like to learn more about them, click here). For now, know that spinoffs offer a great opportunity for outsized returns, and that Tags, along with thousands of your fellow Fools in CAPS, can help you keep track of them. For example, here are two CAPS players who've kept up (and scored) on a couple of spinoffs of their own:

• Last November, CAPS All-Star pencils2 explained why investors were making a big mistake by selling Hanesbrands (which had just been spun out from Sara Lee). "The truth is that all spinoffs experience higher costs, higher taxes, etc., after being spun off. This is because they no longer get support from the parent company, and there are a good amount of costs related to splitting apart. ... What I'm getting at is that this stock is priced like the company is doing terribly, losing business, etc., when it isn't." The stock has soundly thumped the market since.

• Finally, CAPS All-Star bazvanlune, back in August, was one of the first CAPS players to draw attention to Cendant's spinoff of Wyndham Worldwide: "After the typical sell-off characteristic of spinoffs, this will start to gain respect." Wyndham has gained more than 40% since the call was made.

Tag ... now you're it, Fool.  
Whether you'd like to invest in a special situation like spinoffs, profit from the recent subprime debacle, or scour through the beaten-down housing sector, finding great stocks often begins by selecting a category of interest, and then drilling down to find the goodies.

Our Motley Fool CAPS community is a useful way to research a multitude of investment trends taking place in our world. So join Motley Fool CAPS to start using the Tags tool right away. It's tons of fun and it won't cost you a cent.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. Western Union is a Motley Fool Inside Value newsletter recommendation. The Fool has a disclosure policy.