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, like one-star stock Sulphco (AMEX:SUF). Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 110,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 111 CAPS players who've rated CIRCOR International, just two have a bearish opinion. Fueled by that growing Foolish support, the Massachusetts-based provider of fluid control products recently regained its five-star rating.

Less than a month ago, CAPS player LEGMAKER made this rather prescient prediction at the end of a much longer pitch:

Current analyst estimates have the company growing at a 16% percent clip over the next five years. This is very low when we see the increased margins and demand within the energy market. Their business will pick up further as the United States picks up big projects with respect to power generation. I believe they will break through $50 soon and have a great 2008.

Consistent with that call, shares of CIRCOR surged yesterday after management upped its second-quarter profit forecast by about 38%, citing strong revenue and margin growth in its energy segment -- exactly as LEGMAKER had figured.

The bullish lesson?
Don't just assume that a company with consistent earnings growth is priced for perfection. Oftentimes, investors remain anchored to previous forecasts and fail to fully discount the company's true growth potential. Just as CAPS' LEGMAKER demonstrated, capitalizing on the "conservatism" of analysts is yet another way to trounce Wall Street.

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 although yesterday's drop in highly rated Hansen Natural (NASDAQ:HANS) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
About a week ago, for instance, CAPS All-Star jdcarcollector urged Fools to close the book on RH Donnelley:

Going bankrupt. Yellow pages is (1) too expensive, (2) losing pages to the Internet, and (3) seeing mom/pops pull back in this environment, and (4) facing higher commodity prices. Its outdated and going away.

Not surprisingly, shares of the struggling, debt-saddled Yellow Pages publisher are down 21% since that call, and a whopping 96% over the last year. Ouch.

The bearish takeaway?
Make sure the megatrends are your friends. For market-beating returns, it's crucial that you position your portfolio to take advantage of massive shifts in commerce, rather than struggle against where the world is headed. As jdcarcollector understands, buying into "buggy whip" companies disguised as bargains is one of the easiest ways to lose money in the market.

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!