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Tuesday's Biggest Stock Stars

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

Tuesday's Biggest Stock StarsGet original file (17KB)

Without further ado:

Company

Yesterday's Gain

CME Group (Nasdaq: CME)

14.96%

E*Trade Financial

10.98%

Corning (NYSE: GLW)

9.15%

Aflac (NYSE: AFL)

7.81%

NYSE Euronext (NYSE: NYX)

7.40%

There's a reason why I selected those notable gainers, as opposed to other winners making noise on Tuesday, like low-ranked Sirius XM (Nasdaq: SIRI). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 130,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 94.2% of the 764 members who've rated CME Group have a bullish opinion of the stock. Last month, one of those Fools, dereleek, explained why the derivatives-exchange operator looked like a risk worth taking:

Any company that earns 60% operating margin, and a 50% higher net profit margin compared to industry peers that is trading at 68% of book value is a good buy in my opinion. Risk: steep decline in trading volume due to declining hedge fund industry, banks paring back trading operations, and a drop in derivatives volume but it’s still one of the largest exchanges worldwide.

After yesterday's pop, CME is up 21% since that call.

The bullish lesson?
Learn to pounce on companies priced for imperfection. It's virtually impossible to call a stock's "bottom," but if you're confident that the risks are already baked into the price, there's a good chance your investment will turn out well over time. As legendary value investor Sir John Templeton famously said, "The time of maximum pessimism is the best time to buy."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Tuesday's biggest decliners with a one- or two-star rating:  

Company

Yesterday's Loss

First Solar (Nasdaq: FSLR)

7.13%

MGM Mirage

6.19%

Shuffle Master

5.30%

Rangold Resources

3.65%

CIT Group

3.09%

While yesterday's drop in highly rated aluminum giant Alcoa (NYSE: AA) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Two weeks ago, for instance, CAPS member diditbad100 wrote that First Solar's future looked dim:

I believe that margins will get squeezed because new business will be hard to get. Corporations are reducing all expenditures and with a continuing downward spiral in earnings what companies will invest in this high cost alternative energy?

Consistent with that call, shares of several low-rated solar stocks sank yesterday after supplier Energy Conversion Devices lowered its quarterly outlook and said it would delay expansion plans due to the economy.

The bearish takeaway?
Always identify a stock's risk exposures before they come back to haunt you. One of the most common mistakes we make as investors is underestimating how sensitive a business model can be to specific economic and industry-related variables. Unless you can reasonably conclude that a company looks cheap even under the worst of scenarios, you're setting yourself up for heartache if (and when) that worst-case arrives.

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.

Copyright © 2008 Universal Press Syndicate.