Wednesday's Biggest Stock Stars

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

Without further ado:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday -- like MasterCard (NYSE:MA) -- 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 72,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering the arguments made for these picks, our odds of finding the next big winner will surely improve.

Written in the (five) stars?
Silicon Motion, for example, has earned an "outperform" rating from 176 CAPS All-Stars, while a measly seven have been bears. On the strength of that support, the Taiwanese provider of flash memory cards has kept a perfect rating for six months straight.

This outperform pitch -- written by CAPS All-Star NetscribeSemi at the start of 2007 -- signaled good things to come:

The major growth driver for 2007 would be its new xD-picture card controller or flash cards for cameras made by Fuji, Olympus, and Kodak. An estimate for xD-picture card market is approximately 60 million units annually ... Moreover the company has qualified for Microsoft's Windows Vista logo program with its SM321E and SM324 USB flash disk controllers and is all set to beat the market.

Silicon Motion is up 36% since that call, and 63% year over year. And as my Foolish colleague Anders Bylund writes, yesterday's bump came after the company reported a 44% sales increase, while upping its fourth-quarter guidance (thanks to the growing demand for flash memory).

The bullish takeaway? Always try to identify the key drivers of a company's success. Part of valuing a business is plugging in a figure for future growth, but unless you're able to recognize the specific sources of growth -- both industrywide and company-specific -- it might be tough to establish an accurate estimate.   

A little love for the losers ...
Of course, winning isn't everything in the stock market. Here are yesterday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while Wednesday's drops in Garmin (NASDAQ:GRMN) and Centex 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 Doral Financial underperform pitch by CAPS All-Star NetscribeBanking in late December:

... Moreover it would face huge cash drain and illiquidity crunch to retire the $625 million Floating Rate Notes maturing in July 2007. The options like asset disposal, raising equity or refinancing with high yield debt doesn't seem to be a plausible solution to address the issue. The overall financial health of the bank is poor and is heading for a slump.

The Puerto Rican financial-services firm is down 67% since that call, and off a depressing 77% year over year.

The bearish lesson? Not only is it important to identify drivers of growth, but it's also crucial to spot possible sources of a firm's decline. All companies have their problems. But if you're really convinced that management is failing to address impending issues in an effective manner, then it's probably time to say goodbye.

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!