Thursday's Biggest Stock Stars

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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:

Company	Yesterday's % Gain
Brigham Exploration (Nasdaq: BEXP)	13.94%
Fundtech	13.79%
Tengasco	13.25%
Brasil Telecom	9.05%
VAALCO Energy (NYSE: EGY)	9.04%

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star stock Vonage Holdings (NYSE: VG). Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. So far, CAPS has indeed proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 326 CAPS All-Stars who've rated Brigham Exploration, just nine have a bearish opinion. Fueled by that Foolish support, the small-cap oil and gas company recently regained its five-star rating.

In March 2007, CAPS player DanceWithWolf enlightened our community to the progress Brigham was making:

This is a frustrating company to own because management has such a small oil drilling company mentality -- always overly optimistic and thus missing projections which kills their stock. Their fundamentals are great and I think they've finally learned their lesson. Also, 2006 they drilled very aggressively and had pretty good results so production should be up and costs down in 2007.

Brigham Exploration is up an amazing 169% since that call. 

The bullish lesson?
If you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife can certainly be profitable, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote, it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

And now for the losers …
Of course, winning isn't everything in the stock market. Here are Thursday's biggest one-star decliners:   

Company	Yesterday's % Loss
Columbia Banking System	40.82%
MGIC Investment (NYSE: MTG)	22.11%
Freddie Mac (NYSE: FRE)	22.03%
NIS Group	20.24%
Fannie Mae (NYSE: FNM)	13.78%

One-star stocks inspire the least confidence from our CAPS players. So although yesterday's drop in five-star stock Yamana Gold (NYSE: AUY) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Less than a month ago, for instance, CAPS All-Star tutaemeia shared these bearish musings on MGIC Investment:

Even with 1yr return of -82.886%, who can believe that a company that is offering an EPS at the end of the year of -3.29, have an estimated P/E of -3x, and show an ROE of -48.475 is a good investment. How...and by the way, MTG provides private mortgage insurance in the US. I repeat: PRIVATE MORTGAGE INSURANCE.

Consistent with that call, shares of the embattled mortgage insurer plunged yet again yesterday, after Moody's cut its senior debt rating. Moody's cited MGIC's "weakened credit profile and deterioration in medium-term profitability prospects..." -- just like CAPS' tutaemeia had warned.

The bearish takeaway?
Always identify a stock's risk exposures before they come back to haunt you. One of the most common mistakes we make as investors is underestimating how sensitive a business model can be to specific economic and industry-related variables. Unless you can reasonably conclude that a company will remain intact even under the worst of scenarios, investing in deteriorating balance sheets, with tons of unknown exposures, with huge uncertainty about future losses, just isn't worth the headaches.

The final Foolish move
Investors often focus strictly on stock price movements, 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, above all else, 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!