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 Morgan Stanley (NYSE:MS). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. So far, CAPS has indeed proved its market-beating prowess: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 472 All-Star members who've rated Motley Fool Stock Advisor pick Quality Systems have a bullish opinion of the stock. Yesterday afternoon, one of those Fools, Har1en, described the medical-records-software maker in glowing terms:

Another great company with a niche -- medium to large medical practice sales and upkeep of medical records tech. And another No Debt team member! ... Come inflation or deflation, these companies will be able to reprice their products to fit the new landscape and won't be slowed down by debt servicing.

With the help of yesterday's pop, Har1en is off to a nice start with that call.

The bullish lesson?
Learn to capitalize on conservatively capitalized companies. In turbulent times such as these, businesses with rock-solid balance sheets have the flexibility to grow intrinsic value, while debt-laden competitors struggle to just stay alive. As Warren Buffett simply put it in Berkshire Hathaway's Owners Manual, "We will reject interesting opportunities rather than over-leverage our balance sheet."

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 Freeport-McMoRan (NYSE:FCX) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Two days ago, for instance, CAPS All-Star skymutt2 commented on a recent statement from Palm:

Stunning revenue warning. Management blames it on the economy, but it's the product that's the problem, and has been for some time. Trying to execute a turnaround in this environment is not an enviable task.

Not surprisingly, shares of the Treo and Centro maker have continued to slide since that warning on Tuesday.

The bearish takeaway?
If you plan to play the turnaround game, be sure to pick up broken stocks -- not broken companies. A downturn can certainly provide opportunities to buy quality on the cheap, but weaker companies, businesses that were already losing ground, might look just as appealing to bargain-hunters. True, it's darkest before dawn, but as Peter Lynch reminds us, "It's also always darkest before it goes absolutely pitch black."

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!