Wednesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Wednesday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

Company

Yesterday's Gain

Eagle Test Systems

14.15%

Flextronics International (Nasdaq: FLEX  )

12.51%

Oppenheimer Holdings (NYSE: OPY  )

11.51%

Performed Line Products (Nasdaq: PLPC  )

11.28%

CAM Commerce Solutions

10.32%

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like low-rated national bank Washington Mutual (NYSE: WM  ) . Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 83,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, of the 68 CAPS All-Stars who've rated Flextronics International, only a single one is bearish. Back in April, I even singled out the Singaporean electronics manufacturer as an attractively priced growth stock.  

This outperform pitch -- by CAPS All-Star NeroSagetrade just last week -- elaborated on the stock's seemingly scintillating price-to-growth ratio:  

FLEX should produce just north of $1.20 in EPS in 2008 leading to a forward earnings projection just under 8. ... Simply put, their business is solid right now and on paper they could command much more. FLEX tends to move in-line with the S&P 500 but given the recent divergence [it's] time to jump in.

Flextronics is already up 27% since that call. In fact, yesterday's double-digit jump came after the company posted third-quarter EPS growth of 30%, handily topping Wall Street's forecasts in the process. 

The bullish takeaway? Like most things in life, growth is greatest at a good price. By purchasing stocks at a steep discount to their projected growth rates, you give yourself a chance of actually benefiting when (if) your companies perform well. As Warren Buffett says, "The investor of today does not profit from yesterday's growth."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Wednesday's biggest one-star decliners:  

Company

Yesterday's Loss

Ambac Financial Group (NYSE: ABK  )

16.09%

IndyMac Bancorp

15.90%

Security Capital Assurance

14.20%

Flagstar Bancorp

13.00%

MBIA (NYSE: MBI  )

12.64%

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's drop in highly rated Healthways (Nasdaq: HWAY  ) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Ambac Financial underperform call by CAPS All-Star kurtdabear in response to the bond insurer's recent ratings downgrade:

AMBAC's loss of AAA status in the debt markets deprives it of the ability to raise funds competitively, which means it will soon starve to death. ... Its temptingly low P/E [price-to-earnings] will vanish to "N/A" once the coming write-offs wipe out any memory of positive earnings.

Echoing kurtdabear's bearish sentiment, shares of both Ambac and MBIA sank yesterday after activist investor Bill Ackman said the two bond insurers stand to lose far more money than what they, or even the ratings agencies, are currently estimating. And as luck (or an extremely thorough analysis) would have it, MBIA reported a greater-than-expected fourth-quarter loss earlier today -- just as Ackman and CAPS' kurtdabear had suspected.

The bearish lesson? Though the P/E ratio is an important tool, Foolish investors should be aware of its many limitations. Most of the time, stocks look dirt cheap for very good reasons, the most important of which is a declining, or even disappearing, "E." Unless you're confident that earnings won't sink too far, too fast, seemingly low P/E bargains can turn into the market's most expensive, money-losing bets in a hurry.

The final Foolish move
Investors often focus strictly on stock price movements (or the results), without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful investment tips to help identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

Log in to CAPS today and start participating. It's absolutely free and a lot of fun!


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