Thursday's Biggest Stock Stars

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

There's a reason I selected those notable gainers, as opposed to other winners making noise on Thursday, such as one-star airliners AMR and US Airways: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 140,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98.2% of the 1,388 All-Star members who've rated Valero have a bullish opinion of the stock. In late June, one of those leading Fools, matsummk, explained why the oil refiner looked too cheap to pass on:

The downside to this stock is limited (probably $14 to $15 range) while the upside is much higher. Margins have improved due to production cuts but diesel margins are down a lot versus prior year. Valero is the largest producer of gasoline and should benefit from any uptick in the economy.

Following yesterday's pop, Valero is already up by 25% since that call.

The bullish lesson?
The most important job you have as an investor is to quantify a stock's upside and downside. At the very least, you should always make sure you're being compensated appropriately for all the risks you're taking on. If a stock's potential payoff seems generous compared to the chance of loss -- as matsummk surmised with Valero -- it's probably best to take Mr. Market up on his offer.

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

Here are five of Thursday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in highly-rated USG (NYSE:USG) 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 All-Star BSHumphreyII expressed some valuation concerns on STEC:

STEC is a pretty solid company in general, but the stock is overvalued now. The market looks like it's going into price consolidation right now, and that tends to hit hot stocks like this one much harder than others. ... It might be worth another look later this fall, but now definitely isn't the time to buy. The same goes for other fast-growing, high PE stocks.

After yesterday's big fall, shares of the solid-state-drive maker are down 18% since that warning.

The bearish takeaway?
Never mistake a wonderful business for a wonderful stock. As CAPS' BSHumphreyII understands, even the greatest of companies can disappoint Wall Street if its price already reflects much of that greatness. As Warren Buffett says, "Investors making purchases in an overheated [stock] need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

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 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!