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 TiVo (Nasdaq: TIVO). 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, 98.5% of the 911 All-Star members who've rated Allied Irish have a bullish opinion of the stock. Just last week, one of those top Fools, DSmod, explained why Irish eyes would start smiling:

Great risk/reward profile with this stock right now. Let's be honest, complete loss of investment is unlikely at this point, even though the stock is and has been repeatedly valued as such. ... In the much more likely event that [Allied Irish] emerges on the other side of this crisis, savvy investors at these lows will be rewarded tremendously.

Following yesterday's massive surge, DSmod is off to a strong start with that call.

The bullish lesson?
Always be on the hunt for stocks priced for imperfection. It's virtually impossible to call a stock's "bottom," but if you're confident that the risks are already baked into the price, there's a good chance your investment will turn out well over time. As Warren Buffett reminds us, "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

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 five-star stock UnitedHeath (NYSE: UNH) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Late last year, for instance, IdahoAve advised Fools to finally hang up on Palm:

[Google (Nasdaq: GOOG), Apple, Research In Motion (Nasdaq: RIMM)], I just don't see any place for Palm in this picture. We have no need for Palm. Apple has remarkable brand loyalty, Google has enormous technology advantages. ... Blackberry has the business man happily looked after -- so how is it that Pre will somehow gain market share?

Including yesterday's loss, shares of the smartphone maker are already down nearly 50% since that warning.

The bearish takeaway?
Never underestimate the protection that an economic advantage provides. Having a powerful moat is what ultimately drives superior returns on capital, so unless you can clearly identify how a given business has an edge on its rivals, it's probably best to stay away. As Buffett reminds us, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

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!