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 a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Thursday, like low-rated financials Morgan Stanley (NYSE:MS) and JPMorgan Chase. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, 95% of the 108 CAPS All-Stars who've rated Motley Fool Rule Breakers pick Gmarket have a bullish opinion of the stock.

In January, CAPS All-Star TMFBreakerJava helped bring Korea's version of eBay (NASDAQ:EBAY) to our community's attention:

South Korea is booming and GMarket is a rapidly growing online destination, where people buy and sell as on E-Bay but also set up on line stores.

The potential upside is enormous as network effects virtually guarantee that traffic on [Gmarket] will continue to grow rapidly as more and more Koreans come on line.

Shares of Gmarket are up a nice 24% since that call. In fact, yesterday's pop came after eBay received conditional approval from South Korean regulators for a possible stake in the company.

The bullish lesson?
Know when to break the rules. Investing in innovation is notoriously fraught with risk, but by buying into business models that have already been proven to work, and are simply being replicated elsewhere, you can reduce your downside substantially. As value guru Mohnish Pabrai urged in his book The Dhando Investor, "Invest in the copycats rather than the innovators."

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

Here are five of Thursday's biggest one-star decliners:  

While yesterday's drop in five-star stock Dolby Laboratories (NYSE:DLB) may have caught our community off guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In March, for instance, CAPS member dvocean voiced these bearish thoughts on Downey Financial:

I am betting that they will be out of business by the years end. They are highly invested in California Real Estate which is one of the worst in the nation. I think that the financial sector still has some room to go down as the banks start failing.

Not surprisingly, shares of the California-based lender are down 78% since that call.

The bearish takeaway?
Get out of dangerous areas while you can! Just as companies without an ounce of product diversification should give Fools some pause, those that are overly exposed to but a few geographic regions should cause some concern. When things are booming, geographic risk might seem trivial, but as Downey Financial demonstrates, any material troubles in those areas could spell doom for investors.

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!