CAPS Intensive

Perspectives, by Mark Robertson, Managing Partner October 1st, 2007

Incorporating the expectations of a whole bunch of successful fundamental investors to filter our research candidates.

You’ve done some fairly careful screening. Your targets for projected return, quality, financial strength and growth have been met … but your list still numbers 16 stocks or so and you don’t want to perform full studies on all of them. Have you ever yearned for another filter that would further reduce the total while incorporating the expectations of a whole bunch of successful fundamental investors?

I have. And so have you.

I think I’ve found a meaningful resource for precisely this purpose. We’ll continue to explore and test but the Motley Fool’s CAPS “experiment” has been an integral part of the Solomon Selection process for over a year now. Up to that point in time, the relative return (actual vs. S&P 500) had been 180 basis points with some disappointments. Since implementation of some external indicators (including CAPS) the relative return is 820 basis points. Needless to say, the results are intriguing and we’ll continue to monitor them carefully.

Filtering the Sweet Sixteen? This ranking of this month’s Sweet 16 is sorted by the percentage of CAPS leaders who have ranked the stocks to outperform the stock market. 100 out of 101 CAPS leaders (99.0%) have selected Zimmer Holdings to outperform. In contrast, 134 out of 697 CAPS leaders rating Starbucks (19.2%) believe that SBUX will underperform. The median CAPS leader rating is 90%. A rating less than that just might serve as a special screening criteria to guide us to either “avoid” or “study intently” if we decide to remain interested.

Putting A Powerful Resource to Work

A Potentially Powerful Indicator of Fundamental Investor Sentiment? The fire still burns for Energy stocks among long-term fundamental investors but the Financials are still clearly among the unforgiven.

The accompanying graphic for October’s Sweet 16 is one way that this collective opinion might be put to work for us. As shown, it may be prudent to start studying/shopping at the top of this listing. The stocks with an “outperformance index” of less than 90% (bottom six shown here) should be studied carefully and perhaps, purchase decisions postponed.

Wouldn’t we like to know when the collective sentiment against a specific sector or industry shifts? As shown here, negative sentiment in Consumer Discretionary or Financials isn’t a surprise. The value will manifest as we watch for (and detect) a shift, a change in collective expectations, in the future. Seems particularly Foolish to me.

Mark Robertson

Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.