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 a top rating 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 Research In Motion (Nasdaq: RIMM). 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 proven 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, 95% of the 643 CAPS All-Stars who've rated Freeport McMoRan have a bullish opinion of the stock.

Two days ago, CAPS member gcstrong explained why the mining giant was all ready to run:

Flood of new money into the financial system and pending interest rate cut at the end of the month add up to future inflation. [Freeport] is way oversold at this level, and will benefit from increased commodity prices in the coming year. Dividend yield also makes this stock attractive.

Of course, consistent with that call, shares of Freeport McMoRan surged as investors boosted the price of gold in response to yesterday's global rate cut.

The bullish lesson?
Don't give up on the gold just yet. There are plenty of paths to investment heaven, and buying into high-quality, reasonably priced gold stocks has historically been an effective hedge against inflation, oil shocks, and market downturns. Like my Foolish colleague Christopher Barker wrote last week, as "Washington tries to smother a financial fire with cash kindling, I still believe both bullion proxies and well-chosen gold miners will reaffirm gold's relevance as a tangible 'safe haven' asset."

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 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%, annualized.

Did CAPS call the fall?
In late April, for instance, CAPS All-Star shop1 shared some bearish thoughts on XL Capital:

XL has a lot of momentum. Unfortunately, that momentum is in a downward trend. The company reported a dramatic decrease in Q1 net income, down from $562.5 million to $244.4 million. The company's investment portfolio lost $1.4 billion and its insurance divisions profit was squeezed as more claims were paid & insurance premiums were decreased due to competition. Unfortunately, the EPS estimate is decreased for 2008, making XL less attractive to investors.

Not surprisingly, shares of the insurance company are down 73% since that call. In fact, yesterday's plunge came after rival MetLife (NYSE: MET) warned that it would indeed need to raise capital, indicating significant exposure to Wall Street's recent failures.

The bearish takeaway?
If you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife can certainly be profitable, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote, it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

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 invested $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.