Friday's Biggest Stock Stars

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

Without further ado:

The reason I select the largest five-star gainers, as opposed to other big-name winners making noise on Friday -- such as Microsoft and Yahoo! (NASDAQ:YHOO) -- 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 five-star stocks the most likely to outperform the market. By reverse-engineering the arguments made for these picks, our odds of finding the next big winner will surely improve.

Was it written in the five-stars?
Massachusetts-based NetScout Systems, for example, is yet another of the promising small caps that our community has a knack for uncovering. Of the 25 All-Stars who've rated the business-software provider, 24 give it an "outperform" rating. On the strength of that support, NetScout recently received its first-ever five-star rating.   

This outperform pitch -- written by CAPS All-Star manucastle back in August -- highlighted some of the stock's attractive ratios. (We've added in percentage and dollar symbols.)

I have purchased NTCT today

Price = $9.41
EPS = $0.27
Gross profit margin = 77.9% Industry 44.9%
ROA = 5.2% Industry (8.4%)
ROE = 6.6% Industry 8.6%
PE = 34.3 Industry 21.8
Insider ownership = 16.4%
Greenblatt ROC = na
Greenblatt Earnings Yield = 4.27%
...

All good enough for my money. I only recommend stocks that I own!

NetScout is already 52% higher since that call 10 weeks ago, and up a whopping 75% over the last year. In fact, Friday's pop came after management reported year-over-year revenue and net income growth of 18% and 41%, respectively.

The bullish takeaway? If you choose to screen for stocks, ensure that your parameters are well-defined, rooted in logical reasoning, and, most importantly, actually effective. As my Foolish colleague Jim Fink explains here, "mechanical investing" can be a powerful way to pick stocks. But your screen must be easily explainable, and when backtested over at least 10 years, it must prove that it really does outperform.

Now for the losers
Of course, winning isn't everything in the stock market. Here are yesterday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while Friday's big drops in Immucor (NASDAQ:BLUD) and Waste Management may have caught shareholders off-guard, our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
For instance, take this Ambassadors International underperform pitch by JTShideler in September 2006:

This company has had a huge rise in the past year gaining almost 150% since January. The only problem is that I don't really see the financial data to back up that kind of gain. They had a good year and this stock might be a good play in the future but I think it needs to come down and let its financial data catch up with its stock price.

The California-based cruise and event-services company is down 39% since that call, and off 56% from its 52-week high.

The bearish lesson? Always have a sense of how a stock is trading in relation to its intrinsic value. In the short run, stocks can swing drastically, based on factors that have little to do with the company's underlying fundamentals. But in the long run, stocks generally revert to what they're really worth.

As Warren Buffett puts it, the key is to "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."   

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!