Wednesday's Biggest Stock Stars

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

But some price moves are just 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 yesterday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

The reason I focused on the biggest five-star gainers, rather than the largest overall winners, is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?    

Did CAPS predict the pop?
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, 23 CAPS All-Stars have given an outperform rating to Israeli semiconductor company LanOptics, while not a single one has yet to be bearish.

This outperform pitch -- written by scofflaw1 back in October 2006 -- spelled out several of the company's qualities:

This company has no Wall Street coverage and virtually no institutional sponsorship. The company has secured major design wins from Cisco (NASDAQ:CSCO), Juniper Networks (NASDAQ:JNPR), Ciena, Huawei and Nortel (NYSE:NT), in addition to 20 other vendors. The company has been so successful in displacing in-house vendor ASIC solutions that it is now considered viral -- winning multiple designs across business units.

Since that call, LanOptics has returned an amazing 105%.

The bullish takeaway? If it's spectacular returns you're looking for, you almost need to search for companies that Wall Street ignores -- specifically, small ones. Underfollowed stocks tend to be mispriced more often, giving individual investors a huge advantage in the small-cap space.            

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

Here are yesterday's biggest one-star decliners:   

Did CAPS call the fall?
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 in the future.   

This Rentech underperform case, for instance, was made by All-Star pencils2 one year ago:

It's interesting to see how the market works. RTK's revenue rose 900% year-over-year, and the company still can't make money? That's a poorly managed, sad company. The only thing keeping this company running is that the company is selling its shares at an increasing pace. And the insiders have sold 500,000 shares of their own over the past six months. A rising stock price can't continue over the next year or so, which is why I feel this underperform call will be a good decision.         

The California-based alternative energy company is down 48% since that pitch was penned.

The bearish lesson? Excessive share dilution, massive insider selling, and mounting losses are just a few of the warning signs of a poor investment. If a company shows just one of those traits, it's probably best to raise a skeptical eyebrow. But if a company happens to display all three, it's better to just plug your nose and walk away.

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!