Wednesday's Biggest Stock Stars

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

Without further ado:

There's a reason why I selected notable five-star gainers as opposed to other big-name winners making noise on Wednesday, like low-rated financials National City (NYSE: NCC) and Citigroup. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, 98% of the 189 CAPS All-Stars who've rated Motley Fool Stock Advisor pick Safety Insurance Group have a bullish opinion of the stock.

In February, CAPS All-Star MJKpayday explained the safety net being provided by the shares:

Mr. Market has provided us with an opportunity to buy shares of a company trading just barely above its book value and 7 times earnings. Although new competition could hurt margins, the new regulations also gave way for insurers to increase premiums. ... I see the experience of management and the new regulations as opportunities for continued growth and a higher realized valuation of the company easily beating the market.

With the help of yesterday's pop, Safety Insurance is beating the market by some 32 percentage points since that call.

The bullish lesson?
Know your industry environment cold. By figuring out the companies that stand to benefit most from specific regulatory changes (and doing so before Mr. Market does), you'll have a clear advantage in generating an above-average return. As Warren Buffett says, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

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

Here are five of Wednesday's biggest one-star decliners:   

While yesterday's drop in five-star stock Suncor Energy (NYSE: SU) 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?
Two weeks ago, for instance, CAPS member baufi shared some bearish thoughts on Ford Motor:

They might get a backup from the gov in the form of a loan to turn their business around but keep in mind that loans need to be paid off and car sales are not going to head up again for 2-3 years.

Recent oil boom won't be forgotten and it will happen again so more fuel efficient vehicles will need to be built and that take time and considerable amount of money. [Ford] took that direction too late and they will be hurting from that in the coming years.

Of course, consistent with that call, shares of the troubled automaker plunged yesterday as U.S. auto sales fell hard, led by an ugly 34% drop at Ford.

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 model can be to specific economic and industry-related variables. As CAPS' baufi understands, unless it's ahead of the fuel-efficient trends, buying a U.S. automaker during this downturn could spell trouble.

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! 

On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.