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 financials Wachovia (NYSE:WB) and Washington Mutual. 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: Since inception in 2006, five-star stocks are beating the market by 12 percentage points.

Written in the (five) stars?
For example, 98% of the 254 CAPS All-Stars who've rated Barrett Business Services have a bullish opinion. Fueled by that Foolish support, the small-cap human resources management company has kept a four- or five-star rating for more than six months straight.

In January, CAPS All-Star themattgrdt, with the help of Barrett's CEO, brought the bargain to our community's attention:

CEO Bill Sherertz told analysts on the last conference call: "If you guys want to sell [the company] down to five times earnings, maybe I will just buy the whole [expletive] thing."

I read that and gave this thing a thumbs-up right away. That's just awesome. That is seriously the kind of person I'd want running my company.

Consistent with that call, shares of Barrett surged 40% yesterday after the company posted second-quarter earnings well above expectations, issued upside guidance for the third quarter, and received an upgrade from a Wall Street analyst.

The bullish lesson?
Always think like a business owner. All sorts of noise can depress a company's stock price in the short term, but as long as you maintain the mind-set of an owner -- who'd have no problem buying the company outright -- you'll be able to remain patient through the downswings. As Warren Buffett says, "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."

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 members. So although yesterday's drop in highly rated Garmin (NASDAQ:GRMN) may have caught our community off guard, one-star stocks are fully expected to fall hard. Since CAPS started, one-star stocks have dropped an average of 11.4%.

Did CAPS call the fall?
In June, for instance, CAPS member SpookySabra shared these bearish musings on LandAmerica Financial Group:

We are finally seeing data in the mainstream media that reflects the beginning of the housing crisis. Foreclosures are up to record highs. Congress will make attempts to stop us from going into a spin, and while it may not hurt it certainly won't be of much help. I remain personally bearish on anything to do with housing for the intermediate to long term.

Just as SpookySabra had warned, shares of LandAmerica sank yesterday after the title insurer reported a wider-than-expected loss of $50 million on declining mortgage originations.

The bearish takeaway?
Always know where you're exposed. One of the most common mistakes we make as investors is underestimating how sensitive a business can be to specific economic and industry-related variables. As CAPS' SpookySabra understands, unless you can reasonably conclude that a company is dirt cheap under the worst of scenarios, remaining levered to the most toxic parts of the market just isn't worth the headaches.

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, tens of 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!