Thursday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Thursday'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 Thursday -- such as TiVo (Nasdaq: TIVO) -- is simple: Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Our community of more than 76,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its predictive prowess: Over the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, Houston-based offshore driller and Motley Fool Stock Advisor recommendation Atwood Oceanics has maintained a perfect rating for more than six months straight.

This bull pitch -- by CAPS All-Star HistoricalPEguy back in May -- listed some of the scintillating ratios that caught our community's attention:

Growth at an amazing price. PEG = 0.17, if you believe the analysts, but that's the beauty here. You don't have to believe the analysts, just listen to the company and the contracts it's signing. The growth is almost locked in. Expected [earnings-per-share] growth in 2007 = 96%. Expected EPS growth in 2008 = 94%. [Price-to-earnings ratio] = 11.6.

Atwood Oceanics is up 28% since that call and has already delivered an impressive 26% for Stock Advisor subscribers since it was selected last August. In fact, yesterday's pop came after the company announced fourth-quarter earnings and revenue growth of 133% and 49%, respectively, blowing out Wall Street's expectations in the process.  

The bullish takeaway? Combining the best of both value and growth investing strategies is about the smartest approach you can take. By getting into a growing company at a discounted price, you earn the double benefit of buying a stock that trades below its fair value today, and owning a business that can increase that value tomorrow. Just like most things in life, growth is always sweetest when you can have it for free (or at least cheaply!).

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

Here are Thursday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So while Thursday's drop in three-star stock Sears Holdings (Nasdaq: SHLD) may have caught some Fools off guard, one-star stocks are fully expected to fall -- and fall hard. Over the past year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Jo-Ann Stores underperform pitch -- from CAPS All-Star wvwheeling -- late last May:

There certainly is a niche market for fabric, but the size and number of the stores are too many for such a small market. Plus look at the insiders dumping the stock like crazy over the past six months. Revenue, not surprisingly has been flat over the past three years.

The Ohio-based retailer of fabric and crafts is off a depressing 44% since that call. In fact, yesterday's 20% drop came after management significantly lowered its profit forecast for fiscal 2008, citing weak consumer spending as a primary concern.

The bearish lesson? Always keep a close eye on the insiders. If you're already highly skeptical of a given company's business model and valuation, selling by management can serve as a confirmation of your beliefs. Of course, insiders may be selling shares for a wide variety of reasons, but with all of the companies out there -- where management and directors are actually buying their own stock -- why take the chance?

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!