Thursday's Hottest Stocks

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, like low-rated Kohl's (NYSE: KSS). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 150,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 97% of the 828 members who've rated Smith Micro have a bullish opinion of the stock. Just three weeks ago, one of those Fools, llgrout, explained why the stock still had plenty of room to run:

All I can say is that I wish I got into this one when it was much lower, but still at a bargain price. Fundamentals are good, and I certainly see it going over ten, possibly as high as twenty. Risk? Oh yes, it is a crowded sector, but there is always room for more. Potential for return is worth it.

Consistent with that call, shares of the mobile device software specialist surged yesterday after posting better-than-expected quarterly results.

The bullish lesson?
Never become anchored to a stock's previous price levels. Regardless of past gains, a stock can always go higher if the story remains sound, the fundamentals keep improving, and the valuation remains cheap relative to its future growth potential. As CAPS' llgrout understands, ignoring a stock simply because it's rising in price is one of the easiest ways to miss out on the next round of multibagger returns.

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 Coca-Cola (NYSE: KO) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Just two weeks ago, for instance, my fellow Fool Charly Travers (TMFBreakerCharly) advised our community to keep their hands off Palm:

Revenue has evaporated as Palm is losing out to competitors. The company is cash flow negative for several years. Sizable cash balance can keep them afloat for a few years especially since their debt isn't due for a couple years, but bankruptcy is likely an inevitability.

Consistent with that call, shares of the smart phone maker plunged nearly 20% yesterday after warning that its third-quarter revenue would come in "well below" its previous forecast.

The bearish takeaway?
Always follow the free cash flow. Investing, after all, is about laying out money today in order to receive more of it in return tomorrow. As Charly understands, if a business habitually burns through cash, while having little hope for any near-term relief, chances are you won't see a return of your capital, much less a return on your capital.

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 retire wealthy.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!