Thursday's Biggest Stock Stars

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

Without further ado:

Company

Yesterday's % Gain

VASCO Data Security International (Nasdaq: VDSI  )

31.11%

Diamond Offshore Drilling

14.51%

Dow Chemical (NYSE: DOW  )

10.49%

National Oilwell Varco (NYSE: NOV  )

9.27%

Noble (NYSE: NE  )

8.40%

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

Our community of more than 120,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 98% of the 2,168 CAPS members who've rated Motley Fool Stock Advisor pick VASCO Data Security have a bullish opinion of the stock.

Three weeks ago, one of those members, Rak9378, explained why the security software specialist looked safe enough to bet on:

Given VDSI's dependence on banks, this stock has obviously been battered by the mess in the financial markets. However, the fundamentals of the company remain strong. ... The authentication products offered by VDSI are widely used throughout Europe and Asia and will eventually catch on here in the US. VDSI is well positioned to capitalize on this trend.

Consistent with that pitch, shares of VASCO surged yesterday after posting impressive quarterly revenue and net income growth of 32% and 55%, respectively, despite all of the turmoil in the financial sector.

The bullish lesson?
Always make sure the (business) megatrend is your friend. For a proven way to sidestep at least some of the market's punishment, buy into businesses that stand to take advantage of massive shifts in commerce, rather than struggle against where the world is headed. In Wayne Gretzky's words, "Skate to where the puck is going, not to where it's been."

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

Here are five of Thursday's biggest one-star decliners:   

Company

Yesterday's % Loss

Colonial BancGroup (NYSE: CNB  )

55.98%

MGIC Investment

34.70%

DR Horton

20.96%

Pulte Homes

18.49%

Centex

16.25%

While yesterday's gut wrenching drop in highly rated Suntech Power (NYSE: STP  ) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In May, for instance, CAPS member mrbanks08 listed several bearish reasons to stay away from Colonial BancGroup. Here's a small sampling:

1) CNB has a significant presence in Florida and Alabama. The other 3 states have relatively little overall [impact] on the company. ...

Remember, even a stock trading at book value of assets, or below, is still predicated on the quality of the assets. In this case the bulk assets are; commercial loans and real estate in [Florida].

Just as mrbanks08 had warned, shares of the regional bank lost more than half their value yesterday, after the company reported a third-quarter loss of $71.2 million on rising mortgage-related losses and loan provisions.

The bearish takeaway?
Always beware of book value "value traps." Colonial has been selling for less than book value for quite some time, so it would've been easy to consider the stock a no-brainer bargain. Of course, as mrbanks08 correctly pointed out, deteriorating fundamentals, exposure to "bubbly" geographic regions, and the likely forced liquidation of assets made Colonial's stated book value -- along with its share price -- pretty tough to bank on.

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! 

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. VASCO Data Security and National Oilwell Varco are Motley Fool Stock Advisor recommendations. Dow Chemical is an Income Investor selection. Suntech Power is a Rule Breakers pick. The Fool's disclosure policy is always the big winner.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2008, at 2:20 PM, javnnf wrote:

    How can anybody in his/her senses give CBI a 4-star rating?

    This just shows this CAPS rating system could be running by random, or even worse, in a manipulative way with the intention of benefiting certain stakeholders.

  • Report this Comment On October 26, 2008, at 2:31 PM, javnnf wrote:

    Does MF ever care to revise some outrageously wrong rated stock such as CBI?

    CBI has lost more than 80% of its value since the Jan 2008, and yet it has a PE of 285!!

    But it was given 4-star rating by CAPS!! Is there a worst form of madness??

    .

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