Friday's Biggest Stock Stars

We at The Fool usually don't pay attention to day-to-day price gyrations. We prefer to track each business' intrinsic value, which, by its very nature, changes a lot less frequently than Mr. Market's wild swings would have you believe.    

But some price moves are just so big that investors should at least take notice -- especially when we Fools could have seen them coming.

The big winners  
With that in mind, I've summoned our Motley Fool CAPS community to highlight last Friday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

The reason I selected the biggest five-star gainers, instead of the market's biggest overall winners or volume leaders -- like Research In Motion (NASDAQ:RIMM) -- is simple: Stocks go up all the time, but unless you are able predict the pop, what does it matter?  

Did CAPS predict the pop?
Through a consensus of more than 65,000 Fools in CAPS, our community considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, our odds of finding the next big winner will improve.

For example, OYO Geospace, a provider of seismic data equipment, has had more than 400 CAPS All-Stars call "outperform" on its stock, while only five have been bears.

This outperform pitch, written by CAPS All-Star WickedSmaht in 2006, gave investors some sweet insight into OYO's trading charateristics:

Its share price is far more volatile than it should be, which presents significant buying opportunities. The price moves up and down -- more often down -- with the price of oil, but OYOG's market opportunity doesn't change every time oil drops by a few dollars a barrel.

This is a unique stock: a long-term winner with great upside that goes on fire sale on a regular basis. Buy when it drops and hold for several years.

The stock has returned 88% since that call. In fact, OYO is also a two-time pick of our Motley Fool Hidden Gems small-cap service, up 97% and 80% on the first and second recommendations, respectively. Talk about taking advantage of a sale.  

The bullish takeaway? Let the market be your servant. Not your guide. As Benjamin Graham, the father of value investing, wrote, "Look at fluctuations as your friend, rather than your enemy -- profit from folly rather than participate in it."    

Now for the losers
Of course, winning isn't everything in the stock market. Stocks go down, too -- and often very, very fast.

Here are yesterday's biggest one-star decliners:  

Did CAPS call the fall?
One-star stocks inspire the least confidence from our CAPS community. By investigating a few of the bearish arguments made for these losers, we'll have a better chance of averting portfolio disaster in the future.  

Take, for instance, this Sealy underperform pitch found in CAPS:

While this isn't an awful company, Select Comfort (NASDAQ:SCSS) and Tempur Pedic will continue to take Sealy's market share. Sealy has quite a bit of debt and their profitability pales in comparison to SCSS and TPX. As more and more people become interested in getting a better night's sleep, Sealy will suffer.

The North Carolina-based bed maker is down 10% since CAPS player LiLNipsFatal penned that pitch last January, and is off 24% from its 52-week highs.

The bearish lesson? Never underestimate the ravages of competition. In the long run, having a distinct, competitive advantage is what ultimately drives superior returns on capital. So, more often than not, buying the best puppies is what pays off over time.

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. It's absolutely free -- and a lot of fun!