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 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 Yahoo! (NASDAQ:YHOO). 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. And 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 6,147 members who've rated Motley Fool Inside Value pick Chesapeake Energy have a bullish opinion of the stock. Last week, one of those Fools, BailoutBlues, explained why the natural gas provider seemed like a natural selection:

The recent move to possibly issue new shares is confusing. The collapse in commodity prices is also stressing this stock. But [Chesapeake Energy] has hedged against the commodity prices and commodity prices will recover when growth returns to western economies or everyone realizes that the world economy as a whole is still demanding energy.

Consistent with that call, shares of Chesapeake continued to surge following CEO Aubrey McClendon's reassurance on Monday that the company is "resilient."

The bullish lesson?
When the shares of a company you like take a tumble, always try to figure out why. If Mr. Market, in your opinion, is being too short-sighted with his appraisal, it might be a perfect time to buy quality on the cheap. As Warren Buffett once said, "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 highly-rated Nike (NYSE:NKE) 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?
In April, for instance, CAPS All-Star shop1 shared these bearish thoughts on XL Capital:

[XL Capital] has a lot of momentum. Unfortunately, that momentum is in a downward trend. ... 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 insurer are down 88% since that call. In fact, XL shed a third of its value yesterday, following reports that management is seeking to sell the company in the face of widening losses.  

The bearish takeaway?|
What goes down doesn't have to come back up. Trying to catch a falling knife can be profitable, but only if you can conclude -- with a reasonable amount of certainty -- that the price already has the worst-case scenario baked into it. As CAPS' shop1 understands, if a company's financial picture and investor confidence continue to wane, there's no telling how low its stock can go. 

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!