Thursday's Biggest Stock Stars

We at the Fool usually don't pay attention to day-to-day price gyrations. But some moves are just so big that investors should at least take notice -- especially when we could have seen them coming.

The big winners  
With that in mind, I've summoned our Motley Fool CAPS community to highlight Thursday'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 -- such as Motorola (NYSE:MOT) and Sony (NYSE:SNE) -- is simple. Stocks go up all the time, but unless you were able predict the pop, what does it matter?  

Our community of more than 70,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, we improve our odds of finding the next big winner.

Did CAPS predict the pop?
Chinese solar chip maker Suntech Power Holdings, for example, has been a longtime favorite in our community, with over 1,700 players giving the stock an outperform rating. Of course, as a formal pick of our Motley Fool Rule Breakers growth stock service, that number might be Foolishly skewed. Still, I'd say the stock's 104% return over the last year speaks for itself.   

This outperform pitch -- written by CodeCracker back in January -- shines some sun onto our community's thought process:

STP is a Chinese solar chip company that is growing like a weed (sales are up over 100% per year for the last couple of years). What's even better, they're making money, making deals to improve their supply, and the renewable energy market is increasingly attractive to "green" homeowners, utilities, and governments around the world. The company is expected to earn $1.18 in '07 and is projected to grow about 56% a year, so this $35 stock could close to double in the next year or so. I bought some in the 25 to 28 range and recommend purchase on dips.

Suntech is 54% higher since that call was made, and up 86% since it was handpicked by the Rule Breakers team back in 2006. In fact, yesterday's pop came after the company announced yet another major supply deal -- this time, a seven-year, fixed-price contract to buy $1.5 billion worth of polysilicon from Asia Silicon.

The bullish takeaway? Pay attention to companies that aggressively take steps to reduce their cost structure -- especially in an industry like solar energy. Because of the high prices of raw materials, many emerging technologies are simply too costly to bring into the mainstream. In the case of Suntech, though, its consistent profitability clearly indicates that it has some of the most attractive fixed-price contracts -- and therefore, one of the lowest cost structures -- in the industry.

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

Here are yesterday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's major drops in Comcast (NASDAQ:CMCSA) and Time Warner may have caught shareholders off-guard, our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this Big Lots underperform pitch by CAPS All-Star kristm in March:

This is a closeouts and junk retailer, not the second coming of Wal-Mart the way some traders seem to think. Dirty little stores with no consistent advertising or image. I would short BIG on this alone: today after an earnings report, the stock shot to a 52-week high with a P/E of 95. Then management announces they plan to begin a share buyback program. You'd think people in the closeout business would realize you don't buy something (like stock) when it's this overpriced.

The Ohio-based closeout retailer is down 23% since that call. Yesterday's "BIG" price drop, in fact, came after management said it expects same-store sales to fall in Q3.

The bearish lesson? Always have a clear idea of how a company plans to compete. Only then can you assess whether the expectations built into a stock's price are reasonable or not. If management is pursuing a strategy that you're highly skeptical of -- be it due to their lack of skill, tough competition, or simply because you think it won't work -- then a P/E bordering 100 probably isn't even close to being warranted.  

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.

On 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.