Wednesday's Biggest Stock Stars

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Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Wednesday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

Company	Wednesday's % Gain
Capital Southwest (Nasdaq: CSWC)	8.75
Weyco Group	7.48
Telvent (Nasdaq: TLVT)	6.83
Arena Resources	6.58
Digimarc (Nasdaq: DMRC)	6.03

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday -- such as E*Trade Financial (Nasdaq: ETFC) and U.S. Steel (NYSE: X) -- is simple. Stocks go up all the time, but unless you can predict the pop, what does it matter?

Our community of more than 75,000 CAPS Fools considers its five-star stocks the most likely to outperform the market.  

Written in the (five) stars?
For example, Telvent, a relatively underfollowed Spanish IT service provider, has maintained a five-star rating for six months straight. So far, all 71 of the CAPS All-Stars who've rated the stock are bullish.  

Telvent is up an impressive 105% since one CAPS All-Star made a bull pitch exactly one year ago. In fact, Wednesday's sweet little gain came after the company announced yet another major contract win: a 90 million euro project from Dallah TransArabia to increase road safety in Saudi Arabia. 

The bullish takeaway? "Momentum" investing can take many different forms. If management is sparking positive business momentum -- like continuously landing major deals and growing earnings -- a rising stock isn't necessarily expensive. As long as the price run-up reasonably reflects growth in intrinsic value, there's no telling how high the stock can go.

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

Here are Wednesday's biggest one-star decliners:   

Company	Wednesday's % Loss
China Finance Online (Nasdaq: JRJC)	21.32
Hooper Holmes	14.59
Pulte Homes (NYSE: PHM)	12.74
Fleetwood Enterprises	11.83
AbitibiBowater	11.77

One-star stocks inspire the least confidence from our CAPS players. So while Wednesday's massive drop in three-star stock Jamba may have caught some Fools off guard, one-star stocks are fully expected to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this China Finance bear pitch by CAPS All-Star lasindi at the start of October:

They have a high PEG of 3.62 ... The barrier to entry in this market isn't particularly high (look at how much competition there is in the online financial news market in the US). So there is every reason to believe this particular stock's price is being boosted by lots of speculation.

But I also think a big reason for why JRJC is headed down is that its fate is heavily tied to that of the entire Chinese stock market.

Though the Beijing-based provider of online financial data has returned 382% year over year, the stock is down about 50% from the 52-week highs set last month. In fact, Wednesday's 21% drop came after the company reported third-quarter profits below Wall Street's estimates, despite more than tripling its net income.

The bearish lesson? Valuation always matters. Whereas the run-up in Telvent shares seemed to mirror the true value of its business, China Finance's insane gains look to have been sparked by irrational exuberance. China Finance proves, once again, that even the most spectacular earnings growth won't help (and will even hurt) investors if the stock is already priced for the impossible.

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 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!