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 reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like one-star stock Ambac Financial (NYSE:ABK). 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 its inception in 2006, five-star stocks are beating the market by 12%, annualized.

Written in the (five) stars?
For example, out of the 145 CAPS All-Stars who've rated Motley Fool Inside Value pick Nasdaq OMX Group, just two have a bearish opinion. Fueled by that Foolish backing, the New York City-based stock exchange operator has kept a four- or five-star rating for more than six months straight.

In June, CAPS member fuzion23 noted that:

This is one of the best stock exchange out there. Now that they got the OMX deal done. They can concentrate on integrating the two companies together. ... Also in the works right now is the Phily Stock Exchange and Boston Stock exchange. The Phily stock exchange will help boost NASDAQOMX option business and the Boston Stock exchange acquistion will help with second listing business.

Consistent with that call, shares of Nasdaq OMX popped yesterday after it reported impressive second-quarter earnings growth of 81%, as the company's acquisitions are gaining traction.

The bullish lesson?
Always do the due dilly on proposed deals. Some of the better reasons for a merger include gained economies of scale, use of complementary resources, and, as CAPS' fuzion23 pointed out, access to attractive segments. So, if you ever come across a company whose recent spending has prospects for one (or all) of the above, it might be a good idea to jump in -- especially if Wall Street hasn't realized it yet.

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 five-star stock Smith Micro Software (NASDAQ:SMSI) 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%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS member ww2004 commented on the week-long surge in Freddie Mac and Fannie May shares:

How can bailing out the bond holders raise the stock value of a failed company so much in so short a time? Forget about subprime and Alt-A loans and just think about a slowing economy, increasing unemployment, and the continued deflation of housing values. [Fannie] and [Freddie] are going to fall back to their recent lows as bottom fishing investors take profits and wake up to the true value of these stocks.

In line with that bear call, shares of the two mortgage giants plunged yesterday after Freddie Mac posted a second-quarter loss more than three times bigger than Wall Street had expected on continued loan defaults.  

The bearish takeaway?
Never mistake a five-day pop for a five-year trend. As CAPS' ww2004 knows, if a company's environment continues to deteriorate (along with its fundamentals), short-term, Fed-triggered run-ups can last for only so long. Like Benjamin Graham once said, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

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 each other identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

Log into CAPS today and start participating. It's absolutely free and a lot of fun!