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 retailers Children's Place and Hot Topic (Nasdaq: HOTT): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 83,000 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 the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, Power Integrations still has a relatively small following in CAPS, but an impressive 90% of Fools who've rated the stock are bullish. And of the 12 All-Stars who've chimed in on the small-cap circuit maker, only two are bearish.

This outperform pitch, by CAPS player XMFJordan back in June 2006, helped turn our community on to the company's electrifying opportunities:

POWI is currently being hammered due to being caught up in the broadening "back dating" scandal. ... But beneath gunk of the back dating scandal is a solid business with a strong future. ... For a small incremental cost, POWI's products substantially reduce the power usage of those various "vampire" devices around your house or business.

Power Integrations stock has risen 58% since that call. In fact, yesterday's jolt came after management reported a whopping 100% growth in fourth-quarter profit and said that its integrated circuits were rapidly replacing the copper-and-iron "energy vampires" that XMFJordan warned about.

The bullish takeaway? Not all "scandals" are created equal. By figuring out which ones the market has overreacted to, you'll be one step closer to finding a real bargain -- especially if the company has as many growth catalysts as Power Integrations does. To quote Warren Buffett, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

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 while yesterday's massive plunge in Select Comfort (Nasdaq: SCSS) may have caught some Fools off guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped by an average of 16.6%.

Did CAPS call the fall?
Just last month, for instance, CAPS All-Star millionairefools expressed these bearish concerns about Shutterfly:

Looking at the business -- they have absolutely no moat to speak of ... [Walgreen], Wal-Mart (NYSE: WMT) -- all biggies are getting into it. When flickr jumps in the pool, it will only get hotter. The press releases project a company with torrid growth rate riding into the sunset. With a P/E of over 100 and limited room for growth, I disagree.

Consistent with millionairefools' gloomy outlook, shares of the online photo service sank yesterday after the company posted a less-than-expected fourth-quarter profit and issued first-quarter guidance also missing Wall Street's forecasts.

The bearish lesson? Implicit in a stock's price are specific growth, margin, and risk assumptions. Therefore, it's your job as an investor to asses whether those assumptions are reasonable given the company's competitive position in the market. A triple-digit P/E is tough to grow into to even in the easiest of competitive environments, but when so many behemoths want a piece of the action, the odds are that much longer.

The final Foolish move
Investors often focus strictly on stock-price movements (or the results), 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 become a more Foolish investor.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!