Wednesday'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 yesterday'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, as opposed to some of the largest overall winners, is simple. Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Through a consensus of more than 70,000 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 surely improve.  

Did CAPS predict the pop?
For example, Chinese railroad operator Guangshen Railway was recently named one of the top-rated Asian stocks in our CAPS community. Of course, with 160 CAPS All-Star supporters, and a stock that has returned 124% over the past year alone, it's no surprise that Guangshen is so well-received.      

This outperform pitch -- pulled from Guangshen's CAPS page -- clues us in to what captured our community:  

This is infrastructure at its most basic, a huge railroad system in the Chinese province that is closest to Hong Kong. Guangshen Railway operates both passenger and freight lines and has been moving aggressively to buy up everything that looks like a railroad or has any connection to a railroad. To top it off, it seems to have the blessings and active involvement of the government. ... [T]he idea of owning this kind of basic industry is sure appealing.

Since CAPS player marginjim wrote that pitch back in May of 2006, Guangshen Railway is up a whopping 132%.

The bullish takeaway? Always approach stocks with the mentality of an owner. In other words, imagine that you had to purchase and operate the entire business yourself. By taking this view, you'll naturally gravitate to simple (even boring) monopolistic enterprises that sell real products, pay out real cash, and have massive growth opportunities.

After all, as a billionaire tycoon looking to climb atop the Forbes list, what more could you really want?

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:   

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.   

Did CAPS call the fall?
Take, for instance, this MGIC Investment underperform pitch written by All-Star afoolsgold last August:  

Think of the collapse of the mortgage industry as a hurricane, and the underwriter of the insurance MGIC. They are facing deep losses. If a mortgage company makes a loan that's 95% loan to home value, [then] the mortgage insurance company will generally guarantee the top 15% of the loan against losses. We will see a collapse in home prices over the next few years of 10 to 30% and even greater depreciation on condos. Not a pretty picture.

MGIC Investment, which provides private mortgage insurance, is down 28% since that call, and off a stomach-churning 57% year over year. In fact, the 15% drop in its price came after the company announced a third-quarter loss of $372.5 million, and the possibility that it would also take a hit in 2008.    

The bearish lesson? The only way to reasonably predict a firm's fortunes is to thoroughly understand the key variables that make it tick. Unless you're able to identify the truly important issues concerning a stock, you always run the risk of being blindsided when one of those factors takes a sharp turn for the worse. In the above example, foolsgold clearly understood (and correctly predicted) that falling home prices would hurt MGIC Investment.

Simply put: There's really no substitute for knowing the business model cold.        

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!