Converts the "start" in "foo start bar" to "stop", ie runs "foo stop bar". Append :p to do the substitution but print the command instead of running it.
Caret is a word designator in bash's history scheme. Here it acts as a way to mark the thing with the thing being replaced. There's a more detailed explanation in [1] and a quick read in [2]. Essentially bash let's you do manipulation and re-execution of commands from your history and one of the manipulations is via word substitution.