Thursday's Biggest Stock Stars

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 a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Thursday, like one-star automakers General Motors (NYSE:GM) and Ford. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, an overwhelming 97% of the 251 CAPS All-Stars who've rated Houston-based oil refiner Frontier Oil have a bullish opinion of the stock.

Less than two weeks ago, CAPS member rebelseeker helped our community stay refined amid the recent drop in oil:

Long term pick of an essential industry in the [energy] sector. ... Stock price and earnings were hit by increase in crude prices, reducing the crack spread. As with all things this changes. Crude has decreased so now FTO is making money on crack spread. Plans for new refinerys overseas will take time to build; and then the more volatile refined product will have to be transported.

With the help of yesterday's pop, CAPS member rebelseeker is off to a nice start with the stock.

The bullish lesson?
There's really no substitute for knowing a business model cold. By understanding exactly how a business works, you'll be able to focus on the few factors that really make a difference, giving you a better shot at predicting the company's fortunes (or lack thereof). As value legend Marty Whitman once said, "Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Thursday's biggest one-star decliners:  

While yesterday's drop in highly rated InterDigital (NASDAQ:IDCC) 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%, annualized.

Did CAPS call the fall?
On Wednesday evening, for instance, CAPS member mikemasland predicted that the pain was only beginning for Lehman Brothers: "Its overpriced, even at the currently discounted level of $7/share. It will be bought for pennies on the dollar or it will go insolvent."

Of course, consistent with that call, shares of Lehman plunged another 40% yesterday as Wall Street seemed equally unimpressed with the battered investment bank's last-ditch plans to survive.

The bearish takeaway?
What goes down doesn't have to come back up. Trying to catch a falling knife can be profitable, but only if you can conclude -- with a reasonable amount of certainty -- that the price already has the worst-case scenario baked into it. As CAPS' mikemasland demonstrates, if a company's financial picture and investor confidence continue to wane, there's no telling how low the stock can go. 

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!