Thursday's Biggest Stock Stars

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

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star stock Palm (NASDAQ:PALM). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 125,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 98% of the 122 All-Star members who've rated Perficient have a bullish opinion of the stock. Two months ago , one of those Fools, tenmiles, explained why the IT consulting company seemed like a solid small-cap:

Recent small cap drubbing, Perficient, looks attractive for those with 3-5 year horizon. IT consulting is a tough space right now, but this one is consistent grower with attractive value metrics after its price collapse: debt free, strong free cash flow, 10% ROE. Stock buyback in place; also has additional $75 line of credit.

Perficient is beating the market by eight points since that call.

The bullish lesson?
Small companies often provide the biggest bargains. Large caps tend to be priced quite efficiently by Wall Street, so when they get beaten down, there's often a pretty good reason for it. I you really want to take advantage of a market downturn, you need to find the bargains that Wall Street habitually misses: small-cap value stocks.  

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are five of Thursday's biggest one-star decliners:   

While yesterday's drop in five-star stock Allied Irish Banks (NYSE:AIB) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In early 2007, for instance, CAPS All-Star NetscribeBanking was already raising the red flags on Marshall & Ilsley:

The credit quality of the bank has been declining with NPA’s of 0.53% … The mortgage business is weakening as the bank is operating under tough environment with interest rate pressure, shrinking margins and competitive loan pricing. … Moreover, the bank is growing the loan books at a fast pace without having a substantial growth of deposits.

Not surprisingly, shares of the financial services provider are down 79% since that call. In fact, yesterday's drop came after the company's quarterly loss widened to $403.9 million, and said it would cut its dividend in the face of mounting losses.

The bearish takeaway?
Learn to avoid growth when it has gone absolutely wild. When things are booming, it's easy to become complacent as an investor, but that's precisely when you need to make sure management's ambitions aren't getting in the way of sustainable growth. As Warren Buffett says, "You only find out who is swimming naked when the tide goes out."

The final Foolish move
Investors often focus strictly on stock price movements, 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, above all else, 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! 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro, and to receive a private invitation to join, simply enter your email address in the box below.