Tap the wisdom of the investing crowd

By The Motley Fool

You've read the company's financial statements, scoured stacks of Wall Street analyst reports and run a discounted-cash-flow model of the stock you're about to buy. But before you log on to your brokerage account to make that investment, there's one more place you must stop: MSN CAPS.

Home as of mid-May to more than 105,000 investors, the CAPS community is where participants rate their favorite -- or least favorite –- stocks. Stocks are rated from one star (the lowest) to five stars, based on the community's calls and the performance of the players making those assessments.

All players are rated on the accuracy and success of their picks. In the first year for which we have data, five-star-rated stocks have outperformed the market, while one-star stocks have lagged the market.

To better help you find promising stocks, we've introduced the CAPS stock screener tool, which lets you search for stocks using such criteria as CAPS ratings, return on equity, revenue growth and dividend yield.

Once you have a list of stocks to research, you can go to the CAPS page on that company to see what investors are saying about it. Here, we show the "pitches" -- what investors have written to explain their ratings -- as well as the number of players (including the top-rated All-Stars) making "outperform" or "underperform" calls on the stock. Each CAPS page also includes basic details about the company and the stock's performance.

In making their pitches, some players cite qualitative reasons for favoring a stock ("Netflix (NFLX, news, msgs) is a great way to rent movies"). Other participants may focus on higher-level valuation methods. Collectively, these pitches can help you make better investment decisions because they expose you to characteristics about a company that you may not have recognized or known by yourself.

On the Starbucks (SBUX, news, msgs) CAPS page, for example, you can read a former barista's opinion about Howard Schultz's decision this year to take back the CEO reins. On another CAPS page, a registered nurse expresses contempt for a medical-software company's applications and asserts that they're unable to deliver results in a hospital's fast-paced emergency room. Such firsthand information is stuff you won't find in a company's 10-K. Peter Lynch would have loved it!

• Reading the charts: An interactive guide to technical analysis

The CAPS blog is another valuable tool. It's a forum for investors to voice opinions about everything from the Federal Reserve to China to "Saved by the Bell" reruns. I'm sure some will love to read 500 words on "How to Get the Zack Morris Look," but the more popular blogs tend to stick to investing. Some, in fact, are more detailed and written more sharply than many Wall Street reports.

One superior CAPS blogger, who goes by the handle "floridabuilder," holds the title of the community's "most recommended blogger." Floridabuilder's "Builder Alert" blog posts closely track the housing market and the construction companies that have suffered as the housing bubble has deflated. If you have any thoughts about adding a home-building stock to your portfolio, floridabuilder's blog is required reading.

As I mentioned, CAPS investors are ranked based on their correct and incorrect calls. Using CAPS' Top 10 lists, you can easily search for the best investors in the community. At present, each of the three players tied for the top spot made correct calls more than 80% of the time and racked up more than 5,000 points of market outperformance. Take that, efficient market theory.

You can also use CAPS to keep current with Wall Street's top stock pickers. The performance of Wall Street analysts and money managers is tracked via SEC filings, the Briefing.com Web site, TV talk show appearances and recommendations in magazine articles. Presently, the Street's top stock picker is Ken Heebner of the CGM Capital Development Fund (LOMCX), with 71% accuracy and more than 2,000 points of market outperformance.

Additionally, CAPS has a "tags" feature that slices and dices the world of stocks into more than 800 segments. These groupings range from the amusing "Ticker is a noun" to more serious-sounding categories such as "nickel" or "fertilizer."

A fun aspect of tags is tracking stocks headquartered in your state or city. For example, a CAPS user-chosen group of companies headquartered in Phoenix is up more than 45% this year, while a group of Philadelphia companies is down more than 26%. Someone in Philly undoubtedly owes a Phoenician investor a cheese steak for that drubbing.

CAPS can be a tool for investors who just want to have fun with stock picking. After all, we created CAPS to make investing fun, as well as to help investors beat the market.

This article was reported and written by Todd Wenning for The Motley Fool. At the time of publication, he did not own or control shares of any company or fund mentioned in this column.

Published May 28, 2008