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 on 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 the stock is rated "outperform" or "underperform."
  • The length of time it is expected to take to achieve this performance (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 companies with the lowest ratings -- one and two stars -- that have seen investor confidence upgraded one notch higher. Below is a table listing some of the stocks that have seen the stars start to align for them.


CAPS Rating (out of 5)

Current Price

1-Year Return (NASDAQ:BIDU)




Microvision (NASDAQ:MVIS)




Microsoft (NASDAQ:MSFT)




Generex Biotechnology (NASDAQ:GNBT)




Transmeta (NASDAQ:TMTA)




Sources: Motley Fool CAPS and Yahoo! Finance. Price as of close on Nov. 1.

Obviously, this is not a list of stocks to buy, but rather a starting point for further research. Consider this example from one of the companies that appeared two weeks ago on our list. Research In Motion began to move up in price in June, rising from about $55 a share to the mid-$70s in July. Its rating, on the other hand, didn't begin to advance till July. It then 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.

Microvision under the microscope
Miniature-display manufacturer Microvision thinks it can win big by working small. It sells barcode scanners, but its more exciting technology is its PicoP display platform, for which it recently said it signed a major contract with Motorola (NYSE:MOT). That's the sort of deal that attracts even top CAPS investors like TMFBreakerDave, the Fool's own David Gardner. Even so, he offers words of caution potential investors would do well to heed:

One to watch, anyway. A very small company, and an unproven management team. The PicoP looks handy and they have inked a deal with Motorola. Losing money still, loss narrowing with tonight's [8/1/07] earnings (I mean, loss) report. The stock should move up with more acceptance of its products -- that's the big question mark, here. Please don't buy this stock based on my pitch -- this is mostly just a flyer for me, barely researched. More of a "I think this stock could do well" with a better than average probability, but it's such a tiny company it could get squished. Outperform.

Still, it narrowed losses again, beating analyst expectations of an $0.11-per-share loss by $0.03 while essentially matching revenue estimates. A just-announced deal with an unnamed Asian consumer products maker -- what Microvision calls "one of the world's largest consumer electronics manufacturers of mobile phones, digital cameras and personal media players" -- might indeed make this one to watch, as David suggests.

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 supernovas. It's free to sign up and free to post your thoughts, so use this opportunity to take your star turn. is a recommendation of Motley Fool Rule Breakers, and Microsoft is an Inside Value pick. You can check out all the stock selections of either one (or both) for 30 days, risk-free.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.