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 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 Friday -- like Canadian Solar (NASDAQ:CSIQ) -- is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 77,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven that market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, longtime Foolish favoriteICO Inc. has maintained a perfect CAPS rating for more than six months straight. Out of the 210 All-Stars who've rated the small-cap polymer and resin maker, a measly three are bearish.   

This bull pitch -- by CAPS player lasong11 back in December of 2006 -- helped bring the bargain opportunity to our community's attention:

Great looking fundamentals. Looks like a great growth stock for the long-term. Even though the chart looks like a train wreck, it is time to start adding this to your portfolio if you are a long-term investor looking for quality.

ICO has returned a stunning 161% since that call. In fact, Friday's pop came after the company reported whopping fourth-quarter earnings growth of 354% on higher prices and sales volumes.

The bullish takeaway? Never let a chart dictate your investment decisions. A stock should always be assessed on its fundamentals and how cheap it is -- relative to intrinsic value -- today, regardless of what the price has done in the past. As Warren Buffett urges, "Make the market your servant, not your master."

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

Here are Friday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while Friday's drop in five-star stock FormFactor (NASDAQ:FORM) may have caught our community off-guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Palm underperform pitch -- by CAPS player compfreak999 -- late last August:

The [Treos] never really appealed to me. [Research In Motion] and [Apple (NASDAQ:AAPL)] "should" give Palm a run for its money.

RIMM: The business sector
AAPL: The cool full-screen iPhone
Palm: ?????

Consistent with those observations of a deteriorating competitive position, shares of the Treo maker dropped nearly 13% on Friday after management significantly lowered its second-quarter outlook.

The bearish lesson? Never underestimate the importance of seeking a durable competitive advantage. Over the long run, outsized investment gains are the result of owning businesses that consistently earn high returns on capital by filling a well-defined niche. If you have a difficult time identifying where a company's products fit in the minds of consumers -- as compfreak clearly did -- it's probably best to move on.

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 and start participating. It's absolutely free -- and a lot of fun!