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MagicDiligence (< 20)

Top Ranked Magic Formula Stocks In Motley Fool CAPS

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March 02, 2010 – Comments (0) | RELATED TICKERS: GIB , HI , JCOM

Many MagicDiligence readers are probably familiar with The Motley Fool's CAPS service, and for those of you who are not, I highly recommend checking it out. In essence, CAPS is the world's largest free stock picking game. Every player can rate any stock to outperform or underperform the market, for a variety of time periods from "a few months" to "5 years or more". The rating is then assigned a beginning stock price, and the percentage change in the stock price is tracked vs. the change in S&P 500 (including dividends). Picks outperforming the S&P 500 get a positive score, and underperformers get a negative score. Then all players are assigned a rating based on a number of factors, including total overall score, pick accuracy, and so forth. Like high school, the player score is between 0-100, and the higher the better.

For those interested, you can check out MagicDiligence's CAPS page, where I usually post ratings and reviews on the publicly available stocks here at the site.

CAPS is not just a game, though, but also a pretty useful source of information. Every stock has at least a few "pitches", usually just short explanations of why a player chose to give the stock a thumbs up or thumbs down. These are often useful for finding tidbits of information from people inside the industry, and occasionally you can even find full blown company analysis in there. Players are also able to maintain CAPS blogs where they can opine or post information, another useful resource. CAPS does a good job of pushing the cream to the top, too. Players with high scores and lots of pitch and blog activity are regularly highlighted, and easier to find for information on particular stocks.

As for the individual stocks, they are given a score between 1 star (mostly underperform picks) and 5 stars (picks highly weighted toward outperform). It takes a threshold of picks to reach 5 stars, too - CAPS doesn't assign a 5 star rating to a stock with just a single outperform pick, for example! CAPS has done a few annual reviews which have shown that stocks rated 5 stars outperformed 4 stars (and the market), 4 stars outperform 3 stars, and so on. With this in mind, MagicDiligence thought it would be interesting to see what current Magic Formula stocks have earned the highest 5-star rating in CAPS. Here are the results:

Magic Formula Stocks with 5-star CAPS Ratings Arris Group Inc (ARRS)
Chicago Bridge & Iron Co. NV (CBI)
China Education Alliance Inc (CEU)
Continucare Corp (CNU)
Carter's Inc. (CRI)
Dresser-Rand Group Inc (DRC)
EMCOR Group Inc. (EME)
Graham Corp (GHM)
CGI Group Inc. (GIB)
Hillenbrand Inc (HI)
j2 Global Communications Inc (JCOM)
KHD Humboldt Wedag International Ltd (KHD)
Primoris Services Corp (PRIM)
Neutral Tandem Inc (TNDM)
Net 1 Ueps Technologies Inc (UEPS)

When MagicDiligence ran a similar screen back in August, there were no current Magic Formula stocks with the dreaded 1-star caps rating. Today it is the same story - still no 1-star MFI stocks! Again, this is not necessarily surprising. The Magic Formula by design only filters out "cheap" stocks, and the savvy group at CAPS has a healthy if not majority share of value-oriented investors. There are several 2-star MFI stocks, however.

There are some nice choices in the above list, and I highly recommend any MFI investors have a look at the CAPS page of any stock that interests them. MagicDiligence does when looking for Top Buy picks.

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