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.

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like low-rated online retailers Amazon.com (NASDAQ:AMZN) and Overstock. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. Thus far, CAPS has indeed proved its market-beating prowess: Since inception in 2006, its five-star stocks are beating the market by 12%.

Written in the (five) stars?
For example, out of the 537 CAPS All-Stars who've rated Motley Fool Stock Advisor pick VASCO Data Security, 98% have a bullish opinion. Fueled by that Foolish support, the small-cap provider of software security has kept a five-star rating for over six months straight.

Two months ago, CAPS member dani4800 brought the stock's weakness to our community's attention:

I think the recent price drop is due to the lack of understanding by the analyst, and the low follow-up by Wall Street. I am usually not a great fan of tech and growth stocks, but VDSI is making money, its market is expanding ... I think it is a great play: earnings in foreign currency act as a shield against falling dollar; and online banking security is something that is only beginning in the USA, which gives them room to grow there as well.

Consistent with that call, shares of VASCO popped yesterday after posting second-quarter revenue and earnings ahead of Wall Street's expectations on strong order flow.

The bullish lesson?
It pays to stay small. By focusing on attractive small caps that are doing big things underneath Wall Street's radar -- like expanding sales channels and steadily signing new business -- you can consistently find stocks that are inefficiently priced. Once that progress translates into "visible" earnings growth, the company's following (and stock price) will probably get a nice boost, too.

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 members. So although yesterday's drop in highly rated MEMC Electronic Materials (NYSE:WFR) 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%.

Did CAPS call the fall?
Just two days ago, for instance, CAPS All-Star leohaas commented on Tuesday's huge run-up in the airline sector, led by UAL:

Using yesterday's enormous bump up to put my thumbs down again on some airlines ... With fuel prices where they are (OK coming down a little, but that is temporary), service down the drains for all airlines, all of them laying off people, and the dangers of a recession not yet over, I can only see these guys go down again!

In line with that pitch, shares of UAL, along with several other one-star airliners, plunged 20% yesterday on general market weakness and a small rebound in oil prices.

The bearish takeaway?
Keep your portfolio immune from airline sickness. Any sector can pop in the short run, but the dreadful economics of the airline business make it virtually impossible to make a decent long-term profit. In Warren Buffett's words, "The worst sort of business is one that grows rapidly, requires significant capital, and then earns little or no money. Think airlines."

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!