Friday's Biggest Stock Stars

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

Without further ado:

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Friday, like the suddenly coveted Yahoo! (Nasdaq: YHOO). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 83,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, of the 2,073 players who've rated audio technology provider Dolby Laboratories, more than 97% are bullish. Of course, the stock is a three-time pick of our Motley Fool Stock Advisor service -- up an average of 118% for subscribers -- so that Foolish fanfare is easy to understand.  

Nevertheless, this top bull pitch, by CAPS All-Star HLChin last August, shows that Dolby's outperform case sounds pretty crisp on its own:

1) Immense catalyst of HD-TV [DVD] or Blu-Ray awaits Dolby.
2) Mr. Dolby [Ray Dolby, founder] has also a 65% stake.
3) Gross margin of 91% for licensing, and licensing makes up 81% of revenue.
4) Thumbnail says 15% to 23% [discount to intrinsic value] ... not magnificent, but hey the solid-ness and light business model is really enticing.

Dolby Labs is up 48% since that call. In fact, Friday's pop came after the company reported a dazzling first quarter led by mammoth growth in its licensing division -- just as CAPS' HLChin had reasoned.

The bullish takeaway? Always search for founders who "eat their own cooking." Insiders tend to have a better sense of the prospects for their industry, so a high ownership stake can be a positive sign. As HLChin illustrated, Dolby Labs has a ton of tailwinds in its favor, but Ray Dolby's continued stake offers confidence that they'll be properly taken advantage of.

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

Here are Friday's biggest one-star decliners:

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

Did CAPS call the fall?
Take, for instance, this Avid Technology bear call by CAPS All-Star mikenreg:

Their core business is caught between a rock [Adobe] and a hard place [Apple (Nasdaq: AAPL)] ... There's some hope with a new CEO. ... He's going to have to make some dramatic changes which I expect to come in over the next couple years. ... The payoff might come later, but for the next year or so, I see AVID underperforming.

Shares of the film- and music-editing equipment maker are down 28% since that call just last December. Of course, most of that loss came on Friday, after management frustrated investors with a lower-than-expected fourth-quarter profit and mentioned that 2008 would be yet another "transition year."

The bearish lesson? Turnaround plays can be trying. Sometimes, it takes several long years before a company can get back up (if at all) from the competitive forces that knocked it down in the first place. Unless you're patient enough to hold through long periods of uncertainty -- commensurate with a lagging stock price -- turnarounds may not be the best idea.

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!