Wednesday's Biggest Stock Stars

We at the Fool don't always pay attention to day-to-day price gyrations. We prefer to track each business' intrinsic value, which, by its very nature, changes a lot less frequently than Mr. Market's wild swings would have you believe.       

But sometimes price moves are so big that investors should at least take notice -- especially when we Fools could have seen them coming.  

The big winners   
With that in mind, I've summoned our Motley Fool CAPS community to highlight Friday's biggest gainers among the stocks with a top rating of five stars. I've also included a possible explanation -- where I could find one, of course -- for each move.

Without further ado:

Did CAPS predict the pop?
The reason I selected the biggest five-star gainers instead of the market's biggest overall winners or even some of the most actively traded stocks -- like Comcast (NASDAQ:CMCSA) and Sirius Satellite Radio  (NASDAQ:SIRI) -- is simple: Stocks go up all the time, but unless you were able predict the pop before they do, what does it matter?    

Through a consensus of more than 65,000 Fools in CAPS, our community considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, our odds of finding the next big winner will surely improve.  

For example, Ceragon Networks, an Israel-based provider of wireless network solutions, has a whopping 737 CAPS bulls in its corner.

This outperform pitch -- found on Ceragon's CAPS page -- illustrates part of the reason it's been such a Foolish favorite:

Bet you're thinking you missed the boat here, eh? Not a chance. The company is still trading at an enterprise value to 2007 revenue of one, 15 times annualized first quarter earnings (they should post sequential earnings growth, so this 15 x number is understated), and 11 times next year's estimated earnings.

The company has a VERY sound balance sheet with about $30 million in cash and no debt. This will give them a big advantage over their smaller competitors as it will allow them to build inventory quicker for better delivery time.

When CAPS All-Star ianlenobel wrote that pitch back in April, the stock had already returned 27% year-to-date. Yet even after that run, CRNT has managed to shoot up another 130% since.

The Foolish takeaway? Don't base your buy and sell decisions only on a stock's previous returns. Cheap is cheap. If a company continues to be undervalued relative to its future earnings potential, then you've really got to consider jumping in -- whether the stock has returned 50%, 150%, or 1,500% in the past.

Now the losers
Of course, winning isn't everything in the stock market. Stocks go down, too -- often very, very fast.

Here are yesterday's biggest one-star decliners:   

Did CAPS call the fall?
Fools believe five-star stocks will outperform, and one-star stocks inspire the least confidence from our CAPS community. By investigating a few of the bearish arguments made for these losers, we'll have a better chance of averting portfolio disaster.   

Take, for instance, this Hovnanian underperform pitch found in CAPS:

Short it. The housing crash is just starting. There is a multiplier effect: the worse it gets, the more houses are on the market, and the more prices drop, and the more people can't sell at what they paid for ... and on and on.

The New Jersey-based homebuilder, not surprisingly, is down a staggering 52% since CAPS All-Star halfbagger penned that pitch in March. Hovnanian's horrors -- as well as the entire housing industry's -- have been well documented by the Fool, so there's no point beating this bear to death right now.  

The Foolish lesson we can learn today is this: Just because a stock has been beaten up doesn't mean it's automatically "due" for comeback. If the business (and industry) fundamentals continue to get worse, chances are the stock will keep following right along.

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. It's absolutely free -- and a lot of fun!