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, such as low-rated automaker Ford (NYSE: F). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 99,000 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 114 CAPS All-Stars who've rated Universal Stainless, only two have a bearish opinion. Fueled by that Foolish support, the Pennsylvania-based manufacturer of specialty steel products has kept a perfect rating for six months straight.

Last August, CAPS player footchester let our community know why Universal was so special:

Trying to compete on price is a loser's game. But USAP and the other specialty companies can provide value-added products that the low cost bulk suppliers can't produce. There's more money to be made selling one pound of custom steel parts than there is in a ton of bulk steel shapes.

Universal Stainless is beating the market since that call. In fact, yesterday's surge came after the company topped Wall Street's first-quarter profit expectations, on strong demand for its power generation and tool steel products -- consistent with footchester's take.

The bullish lesson?
Buy the best business models. Very simply, companies earn excess returns on capital by maintaining a low-cost structure, or by selling differentiated products at premium prices. As CAPS' footchester demonstrated, identifying value-added products that customers consistently pay up for is often the first step to finding stocks that Wall Street might eventually pay up for.

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 plunge in five-star stock VASCO Data Security (Nasdaq: VDSI) 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 year ago, for instance, CAPS player rlbooth commented on the southward movement of South Financial Group's business model:

TSFG has been on a long slide. Rapid stock growth took place over time as other financial institutions were bought. Absent any M&A activity, TSFG has struggled to set itself apart. What value is being added? Short of a takeover or entry into new markets, I see more downward trend for some time to come.

Shares of the South Carolina-based bank have plunged 70% since that call. In fact, the stock is down nearly 40% since it posted a $201 million first-quarter loss just three days ago -- just as rlbooth had warned.

The bearish takeaway?
Learn how to spot a serial acquirer. There are lots of ways a company can grow, but the "growth-by-rabid-acquisition" strategy is one that Fools should be highly critical of. As CAPS' rlbooth understands, an ever-expanding empire of new companies might seem impressive on paper, but that often has very little to do with real value creation for shareholders.

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!