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.

Without further ado:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star financials Fannie Mae, Freddie Mac, and Wachovia (NYSE:WB). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 304 CAPS All-Stars who've rated Motley Fool Stock Advisor pick Barr Pharmaceuticals, 97% like the stock to outperform. Fueled by that overwhelming Foolish support, the New Jersey-based generic-drug maker has been a five-star stock for more than six months.

More than two months ago, CAPS member petejose helped our community remain patient with Barr's shares:

The basis for owning this (I have real money at a loss right now) is that the industry is in for long, appreciating demand with the population aging and the economy prepared for inflation. ... Demand is only going to grow and this price opportunity presents a buying opportunity, even if the wait for a significant rise is 6 [months] to a year away.

Much sooner than petejose expected, shares of Barr surged yesterday on reports that it is in talks to be bought out by industry leader Teva Pharmaceutical (NASDAQ:TEVA). 

The bullish lesson?
Always think like a business owner, rather than a stock trader. All sorts of noise can depress a stock's price in the short term, but the true investor is able to focus on the factors that really count over the long run. As CAPS' petejose understands, by pouncing on well-positioned companies at depressed prices, you give yourself plenty of "upside" opportunities -- including being bought out by the big boys -- to earn an outsized return.

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 members. So although yesterday's drop by five-star energy stocks Vaalco and XTO (NYSE:XTO) 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?
One month ago, for instance, CAPS All-Star JDSancho made these (income) cutting remarks about National City:

If you've read my other pitches, you'd know that I am making underperform calls based on looming dividend cuts at banks and regionals. ... National City has already cut its dividend twice this year, so it doesn't fit my mold. But, I am still giving NCC a red thumb because of the fact that they had to cut twice this year. Good companies don't have to cut dividends. What does that say about companies that cut twice?

Not surprisingly, shares of the embattled regional bank are already down 12% since that call and a horrific 87% over the past year.

The bearish takeaway?
Learn how to dodge dangerous dividends. Income-paying stocks can be the key to wealth, but if that company lacks the financial strength to sustain and possibly even grow that dividend, you won't see much of a total return on your investment. As CAPS' JDSancho clearly understands, a hefty dividend is only as attractive as the business behind it.

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!