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 four or five stars.

Without further ado:

There's a reason why I selected those notable gainers, as opposed to other winners making noise on Wednesday, like low-rated banks Fifth Third and Citigroup (NYSE:C). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 130,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 92% of the 3,962 members who've rated Disney have a bullish opinion of the stock. In March, one of those Fools, BudFoster56, explained why the House of the Mouse seemed too cheap to pass up:

[Disney] has such a phenomenal stable of brands. … They had $5.6 billion in operating CF in the year ending Sept 2008. That was $3 per share. Say that drops by a third this year, which I think is not going to happen. That still means paying 9x forward looking CF, or a 12% yield. I'll take that over several years.

Disney is already up over 40% since that call. In fact, yesterday's pop came after the company's abysmal quarter -- income dropped 46% in Q2 -- still managed to top Wall Street's expectations.

The bullish lesson?
Learn to pounce on stocks priced for imperfection. It's virtually impossible to call a stock's "bottom," but if you're confident that most of the risks are already baked into the price, there's a good chance your investment will turn out well over time. As legendary value investor Sir John Templeton famously said, "The time of maximum pessimism is the best time to buy."

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

Here are five of Wednesday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in highly rated Dow Chemical (NYSE:DOW) may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In late March, for instance, CAPS All-Star mevanzzz used Centex's CAPS page to build a bearish case against the homebuilders:

The housing market is getting worse than I expected as layoffs have begun eroding fundamental demand. Housing starts low relative to historical norms, and should remain low for quite some time (through 2010?). I don't see how the higher leveraged builders will be able to service their debt or roll over maturing debt in this time-frame.

Consistent with that call, shares of several homebuilders dropped yesterday as quarterly results from the biggest three -- Pulte, Centex, and D.R. Horton -- continued to show very little relief from the housing mess.

The bearish takeaway?
Always identify a stock's risk exposures before they come back to haunt you. One of the most common mistakes we make as investors is underestimating how sensitive a business can be to specific economic and industry-related variables. Unless you can reasonably conclude that a company will remain intact even under the worst of scenarios, investing in highly leveraged, deteriorating balance sheets just isn't worth the headache.

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!