Monday's Biggest Stock Stars

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

Company

Yesterday's % Gain

EnerSys (NYSE: ENS  )

9.62%

First Marblehead (NYSE: FMD  )

5.66%

Anika Therapeutics (Nasdaq: ANIK  )

5.03%

TransDigm Group (NYSE: TDG  )

4.77%

Monogram Biosciences (MGRM)

4.76%



The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Monday -- such as EchoStar Communications (Nasdaq: DISH  ) -- 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 75,000 CAPS Fools considers its five-star stocks the most likely to outperform the market.

Written in the (five) stars?
Aerospace supplier TransDigm, for example, has had 42 CAPS All-Stars call "outperform" on its stock, while not a single one is bearish. Fueled by that overwhelming support, TransDigm has maintained a five-star rating for the past four months straight.

This Foolishly intuitive stock screen -- utilized by CAPS player holopoj early last month -- helped identify some of the company's bullish characteristics:

Screen of 5-star picks by top 80 CAPS players with > = 80% accuracy and stocks that meet:
not in the energy industry
< 30 ttm (trailing twelve-month) P/E
< 30 forward P/E
> 10% profit margin
> 5% [return on assets]
> 2 current ratio

TransDigm is up a respectable 4.2% since that call just a short time ago, and it's nearly doubled over the last year. In fact, yesterday's nice little gain came after the company reported fourth-quarter earnings growth of 62%, thumping analyst estimates in the process.

The bullish takeaway? When searching for superior stocks, don't be afraid to get a little creative. By using some intuition to come up with a customized stock screen, you're forced to think about what you really want in an investment. As long as your methodology has reasonable underpinnings, creating unique investment parameters can be a great way to find hidden treasures.

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

Here are Monday's biggest one-star decliners:

Company

Yesterday's % Loss

Pacific Ethanol (PEIX)

22.28%

FiberTower (Nasdaq: FTWR  )

16.34%

Franklin Bank (FBTX)

15.28%

Somaxon Pharmaceuticals (SOMX)

14.68%

U.S.Parts Network (PRTS)

13.59%



One-star stocks inspire the least confidence from our CAPS players. So while Monday's massive drop in five-star stock Golar LNG (Nasdaq: GLNG  ) may have caught our community off guard, one-star stocks are fully expected to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this FiberTower bear excerpt by CAPS All-Star TMFselzhanik back in late August:

Start with last quarter's revenue of $6.2 million. That's great sales growth -- beyond +100%, year over year. But the goodness ends there. Subtract out a cost of revenue of $14 million. Already, they are looking at a very negative gross margin. ...

Where do they get all this money to lose? The answer is long term debt and shareholders. They took on $404 million in debt in 2004, and have increased that to $409 in the two quarters since. Dilution is also bad news. 34 million shares were outstanding in 2004. That number scales up to 146 million today. But not all of that is funding the company. The insiders have been exercising options and dumping shares on the open market for a year now.

The San Francisco-based provider of wireless backhaul services is down 43% since TMFselzhanik's call, and off a depressing 63% year over year.

The bearish lesson? Don't be (small-f) fooled by the top line. Though strong revenue growth can have a positive effect on shareholder value, it's far from guaranteed.

As Warren Buffett once wrote, describing the "growing" airline industry, "[I]nvestors have regularly poured money into the domestic airline business to finance profitless (or worse) growth. For these investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk: The more the industry has grown, the worse the disaster for owners."

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!


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