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JakilaTheHun (99.94)

TMF Should Allow Us To Rate Microcaps on CAPS

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May 12, 2009 – Comments (2) | RELATED TICKERS: MNST , GMCR , DECK

One of the things I find most frustrating about CAPS is the inability to rate and write commentary on most microcap stocks.  Microcaps tend to offer the greatest potential for gains because they are the most obscure and overlooked stocks in the market.  Moreover, many of them have a ton of room to grow. 

Perhaps I find the inability to rate these stocks even more baffling when I read TMF articles that point out that the best performing stocks of the past decade have almost all been microcaps.  Examine that list and you'll notice that 7 out of 10 would've been completely unratable on CAPS if it had existed in 1999. 

My only thought as to why TMF does not allow us to rate microcaps is that they wish to filter out a lot of the junk stocks that trade on the market.  However, as many of us have witnessed, many of the pump-and-dump and scam stocks are able to get their market cap above $100 million for a period of time, so this does not completely weed out those stocks.  Moreover, I'd argue that being allowed to rate those junk stocks can be beneficial since it might deter investors from buying into them foolishly.

Potential Solutions?

The question to me is how can we allow CAPS members to rate legitimate microcaps while not opening CAPS-land up to an entire world of junk.  I don't think the solution is that difficult really.  Instead of implementing a hard-and-fast 100 million cap minimum, TMF should add na ew filter.

CAPS members should have the ability to rate any stock with a market cap over $20 million that meets certain requirements.  The two easiest filters would be:

(1) A Volume Filter ---  I don't study volume enough to come up with a reasonable "volume limit", but I'd imagine there has to be some number that would be useful.  If the average daily volume of a stock is nearly 1% of its total float, I can't see any reason it would not be ratable. 

(2) Filter by Exchanges --- It makes sense to me why TMF might filter out a lot of the stuff that trades over-the-counter on the pink sheets.  Why not have the 100 million market cap minimum *ONLY* apply to .PK and .OB stocks, while having a lower minimum for stocks trading on the NYSE, Nasdaq, and even AMEX. 

Other Issues?

Perhaps there are other issues as to why TMF does not want to allow rating of microcaps.  One potential issue I could think of is that it might be difficult to plug in data for all those companies (such as income statements, balance sheets, cash flows, analyst earning estimates, etc).  Is that a concern?  There are a number of stocks I see on here where that information is not available any way and I just search the SEC for filings in that case, so I'm not sure if that would be a huge issue for many of us.  I'd rather have the ability to read commentary here, even if I have to go outside of TMF to find financial info. 

Are there other issues? 

Are there any other productive ideas on how to set up filters that would allow CAPS members to rate legitimate microcap stocks without causing too many problems?

2 Comments – Post Your Own

#1) On May 12, 2009 at 2:22 PM, goldminingXpert (29.60) wrote:

People will speculatively issue green thumbs on garbage stocks in hopes of catching a 10-bagger. 10 cents to a buck, yea! and mislead people into thinking that the truly baddest of the garbage companies are worth buying. The Motley Fool has a long history of fighting against penny stocks--with good reason.

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#2) On May 12, 2009 at 3:10 PM, JakilaTheHun (99.94) wrote:

GMX,

"Microcap" does not equal "penny stock". 

TMF already has a filter for "penny stocks".  You're not allowed to rate stocks with a price of less than $1.50.  I'm not even sure that filter makes much sense (e.g. PAL was a spectacular buy at $1; not so much at $6).

However, I don't think that concern would be that valid to begin with.  The *one* and *only* concern I would have is that it might create a venue for pump-and-dumpers, but as I already mentioned --- many pump-and-dumps manage to make it over the $100 million threshold and virtually every pump-and-dump is an .OB or .PK.  Plus, check out the volume on most pump-and-dumps and it's normally quite miniscule.  In fact, that's precisely why stock price can be manipulated so easily. 

If you take a look at most of the scam stocks that do become ratable, almost all of them get red thumbed en masse by the top rated members looking to score cheap points.  Pumping on this site does not have a very good record of success given that. 

 

But really, what does it matter if people issue green thumbs on garbage stocks in hopes of catching a 10-bagger?  If they do that at random, they're probably going to underperform the market by quite a bit and have a dunce cap in their profile.  There were also five-star stocks that lost 80% of their value this year, so believing that you could somehow eliminate people convincing others that bad buys are in fact, good buys, isn't exactly realistic.

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