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 why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star homebuilders Pulte Homes (NYSE: PHM) and KB Home. Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 100,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 45 CAPS All-Stars who've rated O2Micro International, just one has a bearish opinion. On the strength of that top-notch support, the small-cap provider of power management and security components has kept a four- or five-star rating for longer than six months straight.

In January, CAPS player NeroSagetrade commented on why Wall Street seemed to be snubbing the stock:

Just not enough love for high-flying good performing semiconductors lately. O2 Micro makes semiconductors for LCD TV and security devices and has been growing revenues at a steady 25-30% per year. ... The sector they are in is red hot, the overall sentiment of the semiconductor sector is colder than the ice age.

Right in line with that call, shares of O2Micro popped 20% yesterday after the company posted impressive first-quarter profit growth on strong demand in its core markets.

The bullish lesson?
Always be on the hunt for good-looking babies being thrown out with the bathwater. When times get tough for a particular sector, investors tend to sell off all of its contents rather than researching on a case-by-case basis. As CAPS' NeroSagetrade understands, searching in the deep corners of a slumping sector, where things aren't even that bad, can be a great way to spot genuine bargains.

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 highly rated ExxonMobil (NYSE: XOM) 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?
Last October, for instance, CAPS All-Star kad472487 shared these bearish thoughts on Sulphco:

First of all, if "Sonocracking" technology, as [Sulphco] calls it, really worked (or had any chance of working), I don't think it would be stuck in a company with a 626M market cap for almost 9 years. ... I don't expect this technology to work out at all, and with no revenues, I don't believe SUF will be able to operate much longer.

Not surprisingly, shares of the Nevada-based Sonocracking-technology purveyor -- used for the upgrading of crude oil -- are down about 60% since that call.

The bearish takeaway?
Always invest with a healthy dose of skepticism. A company's technology may very well become the "next big thing," but unless it can prove its worth with real sales and profits, there's really no reason to take the bet. Investing is all about the odds, and gambling on unproven, cash-burning companies isn't exactly the best way to put them in your favor.

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, tens of 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!