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A year or so ago, you'd have been a genius if you'd bought energy stocks and sold financial stocks. The energy sector has been a rare bright spot within the Standard & Poor's 500 Index ($INX) over the past 12 months, while financials have been the worst-performing sector.
If only we'd known.
Some of us did know. The MSN CAPS database offered invaluable guidance on a number of stocks in both the financial and energy sectors.
For example, despite Fannie Mae's (FNM, news, msgs) impressivereturn of 38% between July 21, 2006, and July 21, 2007, the CAPS community gave the company just one star -- the lowest possible rating -- back in July 2007.
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As we all know now, the mortgage giant has seen its shares hammered since then. The table below shows similarly dismal results for financial companies Freddie Mac (FRE, news, msgs) and MBIA (MBI, news, msgs) over the past year.
| Company | Sector | 1-year return, July 2006 to July 2007 | Return over past 12 months |
|---|---|---|---|
Mortgage investments | 38% | -78% | |
Mortgage investments | 8% | -86% | |
Credit protections | 2% | -84% |
Twelve months ago, CAPS offered up equally useful insights on several energy stocks. For example, Petroleo Brasileiro (PBR, news, msgs), commonly known as Petrobras, delivered impressive returns of 70% between July 21, 2006, and July 21, 2007.
Our community gave the company a five-star rating a year ago, and Petrobras has gone on to achieve 70% returns since last summer. The table below tells similar stories for Chesapeake Energy (CHK, news, msgs) and Transocean (RIG, news, msgs).
| Company | Sector | 1-year return, July 2006 to July 2007 | Return over past 12 months |
|---|---|---|---|
Natural gas | 29% | 28% | |
Oil and natural gas | 70% | 66% | |
Offshore drilling | 55% | 32% |
Ultimately, our CAPS community had 20/20 foresight when it came to this very small group of energy and financial stocks.
Don't get me wrong, however. CAPS didn't always get it right for individual five-star stocks and one-star stocks. What we're finding is that CAPS ratings appear to have predictive capabilities across an average of all stocks within a given "star" portfolio.
Across the approximately 5,500 stocks in our database, there is striking evidence of the predictive nature of the CAPS ratings.
Below I've provided returns on a portfolio of stocks with a particular star rating between Nov. 6, 2006, and July 3 of this year:
| CAPS rating | Return |
|---|---|
Five-star stocks | 12.1% |
| Four-star stocks | 7.1% |
| Three-star stocks | Flat |
| Two-star stocks | -5.0% |
| One-star stocks | -11.4% |
| 0.1% |
The table provides returns for each star category as stocks come in and out of that particular rating. Returns are calculated on a forward-looking basis for those stocks that are in the particular "star portfolio."
Put CAPS to work for you
As you can see, despite all of the recent market turmoil, five-star stocks outperform the market by 12%, while one-star stocks underperform by roughly 11%. According to this data, investors would do well to look for new ideas among five-star stocks while potentially unloading one-star stocks.Keep in mind, though, that these returns are for an average of each star rating, so you'll still need to do due diligence on specific five-star stocks. (In other words, this information can inform your research, but it's not meant to replace it.)
So how can you benefit from this information? The easiest way is to utilize our CAPS stock screener tool to identify five-star stocks for further research. By looking for winners within a portfolio of stocks that outperform the market -- that is, by fishing in a richer pond -- you might increase your odds of success considerably.
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So join our free CAPS services and take our screener out for a spin. As the database gets smarter, the relative performance of our ratings should get even better. And that's great news for ordinary investors.
This article was reported and written by John Reeves for The Motley Fool. At the time of publication, he owned none of the stocks mentioned.
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