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:

There's a reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like low-rated Advanced Micro Devices (NYSE:AMD). 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. And so far, CAPS has indeed proved its market-beating prowess: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, out of the 82 CAPS All-Stars who've rated ENGlobal, just two have a bearish opinion. Fueled by that Foolish backing, the Houston-based provider of engineering services has kept a five-star rating for the past three months straight.

In October 2007, CAPS All-Star NeroSagetrade noted:

[ENGlobal] will continue to benefit from rising oil prices and the need to build and design more efficient rigs and pipelines. Their results have been indicative of just how vital rising oil prices are to [ENGlobal]'s business. ... Trading at 17.6 times forward earnings and with revenues growing at 15%, I feel it can steadily uptrend during anything other than a straight down market.

Consistent with that call, shares of ENGlobal surged yesterday after the company posted second-quarter earnings and revenue growth of 71% and 52%, respectively.

The bullish lesson?
Don't just assume that a company with consistent earnings growth is priced for perfection. Oftentimes, investors remain anchored to historic growth rates and fail to fully discount a company's true potential. Just as CAPS' NeroSagetrade demonstrated, capitalizing on the "conservatism" of investors is yet another way to outsmart Wall Street.

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 members. So although yesterday's drop in highly rated Frontier Oil (NYSE:FTO) may have caught our community off-guard, one-star stocks are fully expected to fall hard. Since CAPS started, one-star stocks have dropped by an average of 11.4%, annualized.

Did CAPS call the fall?
In March 2007, for instance, CAPS All-Star PennyStockFool shared this succinct bearish thought on PMI Group: "Growth estimates remain outside the box of reality considering most recent developments in not only the sub-prime arena, but also the ever slumping housing market."

In line with that bear call, shares of the mortgage insurer plunged yesterday after posting a second-quarter loss of $246.3 million on continued turmoil in the U.S. housing market.   

The bearish takeaway?
Implicit in a stock's price are specific growth, margin, and risk assumptions. Therefore, it's your job as an investor to assess whether those assumptions are reasonable given the company's competitive position, as well as the industry and economic outlook. As CAPS' PennyStockFool understood, a lofty multiple is tough to grow into even in the easiest of environments, but in a market as sick as housing, the odds are that much longer.

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!