We at the Fool usually don't pay attention to day-to-day price gyrations. But some moves are just so big that investors should at least take notice -- especially when we could have seen them coming.
The big winners
With that in mind, I've summoned our Motley Fool CAPS community to highlight Wednesday's biggest gainers among the stocks with a top rating of five stars.
Without further ado:
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Company
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Yesterday's Gain
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China
Yuchai International (NYSE: CYD )
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18.13%
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E-House (China) Holdings (NYSE: EJ )
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14.07%
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Bolt Technology (AMEX: BTJ )
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10.07%
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Republic Airways Holdings
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7.73%
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Silicom
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7.50%
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The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday -- such as Silicon Labs (Nasdaq: SLAB ) and CEC Entertainment -- is simple. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?
Our community of more than 70,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, we increase our odds of finding the next big winner.
Did CAPS predict the pop?
Chinese brokerage firm E-House Holdings, for example, made its debut on the New York Stock Exchange just three short months ago, yet it already has 157 CAPS players who've called "outperform" on its stock. Because of the growing support from our community, E-House recently received its first ever five-star rating.
This outperform pitch -- written by srains99 during E-House's bumpy first week of trading -- summed up the bullish case pretty well:
[China] is one of the few safe havens from our subprime problems. On top of that this company has explosive growth, strong financials and very strong management. This only came back in price due to our market problems. People sold off because they wanted to ensure they kept the short term profit they made on this stock. Everyone panicked on Thursday and Friday. This is a gift at [$18] and will be [$21] by the end of the year.
Currently, E-House trades at about $30.80 per share, a 67% gain since that call -- a great deal better than even srain99 had predicted.
The bullish takeaway? Not all real estate markets are created equal. In fact, housing is a tremendous growth industry in many booming parts of the world -- especially China. When you have an economy growing as rapidly as China's, with a population as big and as affluent as China's, real estate prices are bound to surge.
By actively seeking attractive markets around the globe, you can not only hedge some of the negative effects of the housing implosion here at home, but you might also be able to make a buck or two in the process.
Now for the losers
Of course, winning isn't everything in the stock market.
Here are yesterday's biggest one-star decliners:
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Company
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Yesterday's Loss
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Autobytel
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8.93%
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Ambac Financial Group
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8.77%
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IndyMac Bancorp (NYSE: IMB )
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8.74%
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Young Innovations
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8.74%
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Countrywide Financial (NYSE: CFC )
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8.11%
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One-star stocks inspire the least confidence from our CAPS players. So while yesterday's big drops in Amazon.com (Nasdaq: AMZN ) and Broadcom may have caught shareholders off guard, our community fully expects one-star stocks to fall -- and fall hard.
Did CAPS call the fall?
Take, for instance, this Countrywide Financial underperform pitch -- written several months before Mr. Market inflicted shareholders with some serious subprime punishment: "If CFC is such a good value, then why have insiders sold nearly $600 million in shares over the last two years yet bought only $73,000 worth (not a misprint). ... On this stock, I have to side with the insiders and rate it a strong sell."
Not surprisingly, the California-based mortgage lender is down a monstrous 63% since CAPS player locosuerte made that call. In fact, CFC dropped 8% yesterday on even more concerns that the delinquency rate on its option adjustable-rate mortgages (ARMs) is growing much more quickly than initially expected.
The bearish lesson? With stocks, you can never be 100% sure of anything. All you can ever do is gather information and play the odds accordingly. Now, it's true that insiders may sell for various reasons that have nothing to do with their outlook on a business. But why take the chance? Why stick with a company whose own management is fleeing the scene, when you can invest with managers (and founders) who own tons of stock, who hardly ever sell, and whose financial interests are aligned perfectly with yours?
If there were ever a way to gain a solid edge in the stock market, investing with "manager-partners" is it.
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, tens of 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!
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