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 signify 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. 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 CAPS investors who make the picks.
Like astronomers scanning the skies, investors can track the movement of a stock's star rating by checking its CAPS rating trend.
Investors can then use this information to help decide whether it is a good time to invest in the stock. In the chart below, we're looking at some better-known companies that have recently seen their ratings rise from one star to two stars.
|
Company |
CAPS Rating |
Price as of 10/11 |
1-Yr Return |
|---|---|---|---|
|
Syntax-Brillian (NASDAQ:BRLC) |
** |
$4.74 |
(15%) |
|
Beacon Power (NASDAQ:BCON) |
** |
$2.17 |
82.4% |
|
Transmeridian Exploration (NYSE:TMY) |
** |
$2.03 |
(45.4%) |
|
DryShips (NASDAQ:DRYS) |
** |
$113.14 |
741.2% |
|
DaimlerChrysler (NYSE:DAI) |
** |
$105.61 |
112.2% |
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, Research In Motion began to move up in price in June, while its CAPS rating didn't begin to advance until July.
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. Then the stock surged again in August, rising to a high of $88 a share, roughly a 33% increase in just one month. So it pays to keep your eyes on the stars.
A brilliant case for Syntax?
Flat-panel-TV maker Syntax-Brillian has been on the receiving end of some tough times: tight credit markets, a shortage of LCD panels, a host of internal problems, and its CFO resigning to run a start-up. The company missed on earnings, and forecast earnings far below what analysts had anticipated, and the stock -- which had traded as high as $12 a share at the beginning of the year -- now dances below $5 a stub. What's to like here? Seemingly a lot!
According to industry analyst NPD Group, mass retailers like Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) saw LCD shelf space grow from 21% to 41% in a year when tier one and tier three brands (like Syntax's Olevia) share space fairly equally. That's different from consumer electronic stores, which tend toward more high-end units. As the seventh-largest LCD screen supplier, according to market researcher iSuppli, there is plenty of opportunity to grow. Even a Robert W. Baird analyst, which downgraded the stock, acknowledged that the Olevia brand remains strong.
Earlier this year CAPS All-Star nick869 noted that the company makes quality, affordable LCD TVs that are in demand in China. While Asia's tightening markets was one reason cited by the Baird analyst for his downgrade, this CAPS player sees long-term growth potential:
Recently rated the only Best Buy among all LCD screen sizes in Consumer Reports. This stock will continue heading north as the Olevia brand gains notoriety. Olevia is huge in China as well, and there will be many TV's sold there with the upcoming Beijing Olympics. Syntax-Brillian also recently purchased Vivitar, which already has a strong network in Europe ... look for increased market share there as well.
The stock has moved up recently, but is that because of shorts getting squeezed (more than 26% of the shares were held short last month) or fundamentals related to the business?
Shine your starlight
We know where the bull and bear positions are, but we haven't yet heard from you. At Motley Fool CAPS every investor's opinion counts. Weighing in with yours could be the difference between these stocks becoming shooting stars or super novas. Considering it's free to sign up and free to post your thoughts, use this opportunity to take your star turn.
