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:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Friday -- like Ford Motor (NYSE:F) and Barrick Gold -- 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 73,000 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?
Synaptics, for example, has a whopping 136 CAPS All-Stars calling "outperform" on its stock, while just a single one has gone the way of the bear. Fueled by that support, Synaptics, which provides touch-screen interfaces, has kept a five-star rating for the past four months.

This outperform pitch -- by CAPS player teskitoe -- touched on touch-screen technology's massive potential:  

iPod clickwheel (supplied by Synaptics) showed that there was a better way to navigate than repeatedly pressing a button a dozen times over.

Similarly joysticks and navigation buttons on phones are outmoded as well. Using a touchscreen is much faster and friendlier. Next time you use the joystick or navigation buttons on your phone think about how much better the experience would be if you could touch the screen to make your selection or scroll or use finger gestures ...

Synaptics has returned 102% since that call and is up 115% year over year. In fact, Friday's pop came after the company reported a 173% increase in first-quarter earnings, citing new contract wins from the likes of LG as the primary catalysts.

The bullish takeaway? Pay attention to stocks that are highly tied to booming, everyday growth gadgets. As our community demonstrates, you don't necessarily have to buy the behemoths marketing the finished product -- which everyone "knows" about -- to profit. Sometimes, investing in the smaller, less-followed -- and therefore, cheaper -- companies producing its parts can be even more rewarding.

A little love 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 Merrill Lynch (NYSE:MER) 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 Orleans Homebuilders underperform pitch by CAPS All-Star sleepyseth in November 2006:

The entire housing industry is going further down and this company is going down with it. ... On a further note, I know that the PE ratios of these companies look [minuscule]. But when you consider how much earnings will shrink, the future [P/Es] are actually much higher. Expect more weakness before an improvement.

Not surprisingly, the Pennsylvania-based homebuilder is down 56% since that call.

The bearish lesson? The P/E ratio essentially tells you nothing without context. A company with a P/E of 40 -- whose earnings are growing at a 100% clip -- might very well be a steal. A company with a P/E of 10 -- but whose earnings are shrinking rapidly -- might be one of the market's more expensive stocks.

Try staying out of value traps by using the price-earnings-growth (PEG) ratio -- one of master investor Peter Lynch's favorite metrics -- as well.

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!