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 I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star financials Washington Mutual (NYSE:WM) and MBIA. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 105,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And 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 329 CAPS All-Stars who've rated China Medical Technologies, 98% have a bullish opinion. Fueled by that Foolish support, the Beijing-based medical device company has been a four- or five-star stock for more than six months straight.

Just last week, CAPS player Itn2000 made this fearless forecast:  

Innocent victim of market selloff!!!

Expect $43 per share in 2 months.

Opportunity to buy cheap stock.

Earnings report due out on June 12.

Expect solid earnings like all others reported in company's history.

Great play in global slowdown and take advantage of Yuan's gain over US dollar.

Has over 1 billion people in China to serve. Not to mention sales outside of China.

And just as Itn2000 boldly predicted, shares of China Medical soared yesterday after the company's fourth-quarter profit grew 39% (in dollars) on higher diagnostic test sales.

The bullish lesson?
Don't just assume that a company with consistent earnings growth is priced for perfection. Oftentimes, investors remain anchored to historic growth rates and fail to fully discount a company's true potential. Just as CAPS' Itn2000 demonstrated, capitalizing on the "conservatism" of investors is yet another way to outsmart Wall Street.

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 highly-rated Apple (NASDAQ:AAPL) 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 weeks ago, for instance, CAPS All-Star AnomaLee keyed us in to KeyCorp's future:

I stay in Cleveland where they are headquartered. They service the weakest local economies in the country. They have high exposure to non-performing construction loans. Besides the figures, their 10-K was poorly written and overcomplicated which was the first smoke signal.

Consistent with that call, shares of KeyCorp plunged yesterday after an unfavorable tax ruling forced the company to slash its dividend in half and issue about $1.5 billion in new equity.

The bearish takeaway?
Never own anything you can't understand. As CAPS' AnomaLee demonstrates, by simply acknowledging when something is "too confusing," you can stop yourself from diving into a toxic abyss of unknown risks. Like Warren Buffett put it, when asked how investors could ever know whether the portfolios of big financial institutions are safe: "They can't, they can't."

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!