Tuesday'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's 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 yesterday's biggest gainers among the stocks that have a top CAPS rating of five stars.

Without further ado:

The reason I selected the biggest five-star gainers, as opposed to some of the largest overall winners -- such as United Microelectronics (NYSE:UMC) and Miramar Mining (AMEX:MNG) -- is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?    

Did CAPS predict the pop?
Our CAPS community of more than 65,000 investors considers five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments our CAPS participants have made for these picks, we can increase our odds of finding the next big winner.

For example, Mechel, a Russian coal and steel producer, has kept its five-star rating for the past five months straight. And not a single CAPS All-Star has yet given the stock an underperform rating.

This outperform pitch -- written by CAPS All-Star manucastle back in May -- broke down many of Mechel's attractive ratios:  

Price = 34.19
EPS = 3.24
Gross profit margin = 33.4 Industry 19.7
ROA = 11.3 Industry 11.3
ROE = 18.6 Industry 23.1
P/E = 11.3 Industry 12.4
Insider ownership = 90.0
Greenblatt ROIC = 25.38
Greenblatt Earnings Yield = 10.07
MaxPrice = 57.52 Discount (to fair value) 37% **

VERY undervalued in my book!

Since that call, MTL has returned a remarkable 96% and is up 206% year over year -- even better than manucastle had predicted.

The bullish takeaway? Always search for quality on the cheap. It's pretty rare to find a company that has higher margins than the industry and is also selling at a discount to the industry. But when you do, you're probably staring at something special.     

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

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 our participants have made for these losers, we'll have a better chance of averting portfolio disaster in the future.   

Take, for instance, this Santarus underperform pitch:

Santarus is a pharmaceutical firm trying to promote a branded form of omeprazole (generic) in a market that is dominated by large pharmaceutical companies with significantly greater resources. The company has managed to grow revenues but not to the extent that they cover their expenses related to marketing and sales. They need a new product in order to cover their expenses and this is likely their only way to succeed short of a buy-out.

The California-based company has fallen a gut-wrenching 74% since docmase penned that pitch in October 2006. As a matter of fact, docmase happened to make the call on the exact same day Santarus hit its 52-week high. Talk about calling a top.

The bearish lesson? Though it's true that tiny companies can offer remarkable returns, they also can provide the largest losses if you're not careful. By ensuring that your smaller stocks all have solid financials, enjoy wide market opportunities, and fill a niche that's not being fought over by multibillion-dollar behemoths, you'll be well protected from a small-cap catastrophe.

The final Foolish move
Investors often focus strictly on stocks' price movements (or the results), without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, tens of 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!