Thursday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight yesterday'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 -- like Unilever (NYSE:UN) and Assurant -- is simple. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 71,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering the arguments made for these picks, our odds of finding the next big winner will surely improve.

Written in the (five) stars?
For example, with just 40 total CAPS ratings, Michigan-based Perrigo has a relatively small following in our community. But out of the 15 All-Stars who've chimed in on the generic-drug maker, each one has a bullish opinion.

This concise outperform pitch -- pulled from Perrigo's CAPS page -- highlighted a few key issues for the community:

This company went public about 15 years ago. They have a gastrointestinal med that is switching from Rx to OTC which should benefit them. Biggest customer is Wal-Mart, second biggest customer is CVS. 20%+ exposure overseas. I think it's a good buy.

Perrigo has returned 31% since Capsperson made that call two short months ago, and is up 51% year over year. In fact, yesterday's jump came after the company more than doubled its first-quarter profit, while management also raised its 2008 guidance.

The bullish takeaway? Pay attention to companies with looming positive catalysts. Many times, Wall Street fails to account for specific events that should indeed drive the stock higher. Betting on catalysts might be a tad speculative for some Fools, but if the company already has a few good things going for itself -- as Capsperson demonstrated with Perrigo -- then it might be worth the shot.

A little love for the losers ...
Of course, winning isn't everything in the stock market.

Here are yesterday's biggest one-star decliners:

One-star stocks inspire the least confidence from our CAPS players. So while Thursday's massive drop in Crocs (NASDAQ:CROX) may have caught a few Fools off guard (it's rated a two-star stock in CAPS), our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this Ambac Financial underperform pitch by CAPS All-Star TMFWarrenBuffettJr in early June:

$800 billion worth of subprime loans will reset in the second half of this year (2007). $18.7 billion worth of subprime loans are sitting on AMBAC's books. The exposure is equal to 284.4% of statutory capital. Leverage (Face Value Bonds/Statutory Capital) is 80.8 to 1.

The New York-based financial guarantor is down 66% since that call. Yesterday's drop, in fact, was caused by more of the same fears that cash-poor borrowers won't be able to repay their obligations.

The bearish lesson? Seriously consider selling any company in your portfolio that uses a massive degree of leverage. If the stock hasn't yet fallen off the cliff, then consider yourself lucky. When TMFWarrenBuffettJr penned that pitch, Ambac shareholders were only starting to feel Mr. Market's wrath.

Taking a chance on overleveraged companies simply isn't worth the risk. As the real Warren Buffett says, "We will reject interesting opportunities rather than over-leverage our balance sheet."

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!