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:

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 stocks Ambac Financial (NYSE:ABK) 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 120,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. So far, CAPS has indeed proved its market-beating prowess: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 96% of the 215 CAPS members who've rated Exide Technologies have a bullish opinion of the stock. Four days ago, one of those Fools, Alwaysgolong, explained why the maker and recycler of lead-acid batteries looked fully charged to pop:

PE in the bargain basement. Good cash this year. Sitting pretty to take advantage of upcoming alternative fuels boom. Exide has the best tech on earth for the next generation of Lithium batteies. Price of oil will go up (it always does) and push the magic button for this stock to rise to all time highs.

Exide Tech is beating the market by 22 points since that call.

The bullish lesson?
Know when to break the rules. Revolutionary "next-generation" technologies are notoriously fraught with risk. But by buying into genuine, top-dog first-movers at heavily discounted prices, you can reduce your downside substantially. As CAPS' Alwaysgolong understands, identifying enormous potential on the cheap can actually be a safe way to multibagger returns.

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 plunge in five-star stock Chesapeake Energy (NYSE:CHK) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In late October, for instance, CAPS member SeekBalance used Centex's CAPS page to build a bear case against the homebuilders:

Homebuilders are nowhere near being out of the woods yet. Month to month comparisons of housing starts, sales volume, and prices on older home resales are all dismal and show signs of maybe even worsening. There simply isn't a real estate market in many parts of the country.

Consistent with that call, shares of Centex (along with several other one-star homebuilders) sank yesterday after a report indicated that housing continues to worsen, as residential construction for October slowed to a record low.

The bearish takeaway?
Like CAPS' SeekBalance understands, if you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife of an industry can work on occasion, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote, it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

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!