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 one-star homebuilders Beazer Homes (NYSE: BZH) and WCI Communities (WCI): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 86,000 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 252 All-Stars who've rated China Fire & Security Group, a whopping 99% are bullish. Fueled by that support, the Beijing-based provider of fire-safety products has kept a perfect rating for more than six months straight.

Just this past Tuesday, China Fire's stock plunged 40% after sharesleuth.com, a website dedicated to exposing scandalous stocks, raised several concerns regarding management's integrity. However, the general response from our community, including the following pitch from CAPS All-Star JMJeffrey, is that the fears are completely overblown: "A recent integrity scare (setup?) has sent the share price into 'free-fall' but I believe there is a solid business and market behind this 'wild East' company. Investing in China has its risks ... but if you can stomach the risk and see the profitable business and market potential it may be worth a sliver in a diversified portfolio."

China Fire has bounced back by more than 40% since Tuesday's drop, in large part because of the board's prompt approval of a $10 million share buyback on Wednesday.

The bullish takeaway?
Be greedy when others are fearful. As long as you've done your homework and are absolutely convinced of a company's long-term potential, a bit of skepticism from Mr. Market can create perfect buying opportunities. As Warren Buffett says, "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 although yesterday's drop in five-star stock Metalico (AMEX: MEA) 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 by an average of 16.6%.

Did CAPS call the fall?
Late last October, for instance, CAPS All-Star FoolishG8R shared these bearish thoughts on Virgin Mobile:

$1.2B market cap with $541M in debt, no thanks.

They have no control of technology, just resell Sprint (NYSE: S) service and must pay Sprint, who is under pressure, whatever they want. All customers are prepaid and have a high churn rate.

Shares of the wireless provider have fallen more than 80% since that pitch. In fact, yesterday's plunge came after the company cut its profit guidance for 2008, as Virgin's subscriber base (largely lower-income, lower-credit customers) seemed particularly sensitive to the slowing economy -- consistent with FoolishG8R's gloomy outlook.

The bearish lesson?
Get to know your customer. Different economic conditions affect different market segments in different ways, so make sure you're aware of how the prevailing environment stands to affect your own investments. If a good chunk of your portfolio is exposed to consumers extremely vulnerable in a recession, a la Virgin Mobile, you might be in for an unpleasant surprise.  

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, 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!