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Top Ranked Magic Formula Stocks in Motley Fool CAPS

|Includes: Almost Family Inc (AFAM), ASTX, CHKE, DLB, DRIV-OLD, EME, GNI, HRS, TNAV, TTHI

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. More than 170,000 individual investors have rated more than 5,600 stocks. 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 under-performers 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. 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!

This system has proven to be successful in predicting winning stocks. So successful, in fact, that the Motley Fool has actually won a patent for the it. Since the service launched in 2006, 5-star stocks collectively have outperformed the S&P 500 by an impressive 51%. 5-star stocks have outperformed 4-star stocks, which have outperformed 3-star stocks, and so on. The bottom feeders, the 1-star stocks, have collectively *underperformed* the S&P by 31% (source).

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. Theoretically, these are cheap stocks of efficient companies that many investors believe will beat the market going forward. Here are the results:

Magic Formula Stocks with 5-star CAPS Ratings (as of 6/28/2011)

Almost Family Inc (NASDAQ:AFAM)
Cherokee, Inc. (NASDAQ:CHKE)
Dolby Laboratories Inc (NYSE:DLB)
Harris Corp (NYSE:HRS)
LML Payment Systems Inc (NYSEARCA:LMLP)
SuperGen Inc (SUPG)

Conversely, Magic Formula stocks currently rated 1-star in CAPS could be ones to avoid, or at least apply a little extra scrutiny to. 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, so there usually are not a lot of these. The current 1-star rated ones are:

Magic Formula Stocks with 1-star CAPS Ratings (as of 6/28/2011)

Great Northern Iron Ore Properties (NYSE:GNI)
Transition Therapeutics Inc (NASDAQ:TTHI)

There are some nice choices in the 5-star 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.

Disclosure: Steve owns AFAM