Wednesday's Biggest Stock Stars

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

Without further ado:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like low-rated Canadian Solar (Nasdaq: CSIQ). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 85,000 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: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, of the 1,627 CAPS players who've rated software security provider VASCO Data Security, a whopping 98% are bullish. Of course, the stock is a Motley Fool Stock Advisor selection, so our community's positive sentiment is easy to understand.

Late last month, CAPS All-Star ShuntSD penned this pitch in response to VASCO's recent 37% price plunge:

Look at their history of strong revenue and earnings growth. Their balance sheet is extremely strong with no debt and tons of cash. I view this as a tremendous value right now. The recent price drop (due to delayed orders requested by customers) makes this an unbelievable bargain.

Just as ShuntSD had waxed, shares of VASCO popped more than 10% yesterday after a Wall Street analyst upgraded the stock, possibly seeing value after the large decline.

The bullish takeaway?
Not all stock haircuts are created equal. One of the most important (and toughest) jobs you have as an investor is to figure out when Mr. Market is justifiably punishing a stock, and when he's being far too shortsighted. As Benjamin Graham once wrote, "In the short run, the market is a voting machine, but in the long run it is a weighing machine."

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

Here are Wednesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So although yesterday's drop in highly rated KongZhong (Nasdaq: KONG) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Back in December, for instance, CAPS All-Star NeroSagetrade shared these bearish thoughts on Alesco Financial:

Business is very weak and their mortgage backed assets are declining by the day. There is no way this company can maintain their hefty dividend, and trust me, that 12% yearly dividend is the only thing keeping investors in this stock. I highly doubt they will survive under their current structure.

Not surprisingly, shares of the specialty finance real estate investment trust have plummeted 42% since that call, and are down 78% over the last year.

The bearish lesson?
Learn to dodge dangerous dividends. High-yield stocks can be alluring, but if that company lacks the financial strength to sustain and possibly even grow that dividend, you won't see much of a total return on your investment. A nice-looking dividend is only as attractive as the business behind it.

The final Foolish move
Investors often focus strictly on stock price movements (or the results), without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, tens of thousands of investors are Foolishly sharing insightful investment tips to help identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor.

Join the CAPS community today. We need you. It's absolutely free and a lot of fun!