Thursday's Biggest Stock Stars

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

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like low-rated homebuilders Beazer Homes and Meritage Homes (NYSE: MTH). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 96,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. So far, CAPS has indeed proved its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 86 CAPS All-Stars who've rated FCStone Group, only one has a bearish opinion. On the strength of that sentiment, the small-cap commodity risk-management firm has kept a four- or five-star rating for more than six months straight.

Back in August 2007, CAPS player wangman showed us a way to manage risk:

I am anticipating a long-term slowdown. During that time, commodities will be king, and the companies that mine/obtain those commodities will do well.

FCStone manages risk for those companies and also stands to benefit. I see the recent dip as a buy opportunity, and regret not making this pick on the day of the IPO (I have IPO shares still).

FCStone is beating the market since that call. In fact, yesterday's huge gain came after the company posted impressive second-quarter profit growth of 75%, fueled by continued volatility in the global commodity and financial markets -- consistent with wangman's take.

The bullish takeaway?
Be one with your environment. We Fools don't necessarily advocate a top-down approach to picking stocks, but buying into businesses that stand to benefit from distressed market conditions is a great way to play defense. As CAPS' wangman understood, being levered to commodities, and better yet, the volatility of commodities, can act as a smart little hedge during economic downturns.

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

Here are Thursday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So although yesterday's drop in five-star stock and Motley Fool Rule Breakers pick Suntech Power Holdings (NYSE: STP) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Two months ago, for instance, CAPS player gea1968warned of the dangers lying in Ambac Financial's portfolio:

The only thing worse than a pile of worthless debt is a pile of highly-leveraged, inaccurately priced debt. The entire financials sector will be hurt by this, as CDO's, SIV's, and other arcane piles of worthless debt become repriced. And sitting at the epicenter of this crisis: ABK.

As if to echo that bearish sentiment, shares of Ambac fell yet again yesterday after JPMorgan Chase (NYSE: JPM) said it slashed its stake in the embattled bond insurer by about 95%.

The bearish lesson?
When you primarily focus on researching risks, the rewards just usually take care of themselves. Unless you conclude that a company will remain intact even under the worst of scenarios, investing in hyperleveraged balance sheets (with tons of unknown exposures) can lead to financial ruin in a hurry. As Warren Buffett said, "You only have to do a very few things right in your life, so long as you don't do too many things wrong."

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!