Wednesday's Biggest Stock Stars

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:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, such as bond insurers Ambac Financial Group (NYSE:ABK) and MBIA. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 78,000 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 the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, an impressive 96% of the 241 CAPS players who've rated Amerigon are bullish. Last October, we even highlighted the Michigan-based provider of thermoelectric technologies (primarily for the auto industry) as one of CAPS' free cash-flow kings.

This bull pitch -- by CAPS All-Star samdude3 back in October of 2006 -- was one of the first to outline the stock's strong points for our community:

They have great profit margin, great growth, awesome ROE, and LOW DEBT. This company has a very low downside and an upside that's huge. I'm expecting these products in almost every car that comes off the line down the road. I see 1 down and 6 up for the next year.

Amerigon is up an incredible 139% since that call.

The bullish takeaway? Never forget your Foolish fundamentals. Stocks are risky business, but purchasing growing, free cash-flow generating, high-return businesses with rock-solid balance sheets can stack the odds overwhelmingly in your favor. As long as you remain disciplined about price, screening for superior financials can often lead to the next home run stock.

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

Here are Wednesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's drop in four-star stock Mueller Water Products may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Hooper Holmes bear call -- by CAPS player bluejonnyd -- just over one month ago:

let's pretend for a moment that the analysts' dreams of 2009 earnings of $0.04 per share come true, not exactly likely given that the company has a history of missing even negative earnings forecasts, and that revenues have been steadily declining in recent years. At any rate, if the analysts' predictions turn up correct, we could be faced with the option of buying the stock for (an expensive) 40x earnings. At 15% expected annual growth as well.

The New Jersey-based provider of health-care assessment services is down 5% since that pitch, and has fallen 50% over the last year.

The bearish lesson? The most important job you have as an investor is to quantify a stock's upside and downside. At the very least, you should always make sure you're being compensated appropriately for the risks you're taking on. If a stock's potential payoff seems minimal even under the most optimistic of scenarios -- as bluejonnyd surmised with Hooper -- it's probably best to move on.

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!