Wednesday's Biggest Stock Stars

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

Without further ado:

There's a reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like one-star stock Beazer Homes (NYSE:BZH). Stocks go up all the time, but unless you are able to predict the pop, what does it matter?  

Our community of more than 110,000 CAPS Fools considers its five-star stocks the ones 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 244 CAPS All-Stars who've rated Motley Fool Hidden Gems Pay Dirt  pick International Coal Group, only six have a bearish opinion. Fueled by that steady support, the West Virginia-based coal producer earned a five-star rating.

Last April, CAPS player chitownjester explained exactly what set the stock apart:  

Not coal- METALLURGICAL GRADE COAL. Big difference. You need met coal to do things like make concrete and steel, which the global economy is demanding a lot of these days. These guys have a whole lot of it. Also doesn't hurt to have favorable structural costs relative to competitors and a proven owner/investor in Will Ross running the show.

International Coal has already doubled since that call. In fact, yesterday's jump came after a Wall Street analyst raised his 2009 price target for coal, citing continued growth in international demand, while supply is expected to decline -- consistent with chitownjester's pitch.

The bullish lesson?
There's really no substitute for knowing a business cold. The only way to predict a company's fortunes is to understand how it uniquely interacts with industry and economic variables. As CAPS' chitownjester understands, knowing exactly what separates one business from the next could make the difference between market-beating and market-lagging returns.

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 in our CAPS players. Yesterday's drop in highly rated Middleby (NASDAQ:MIDD) may have caught our community off-guard, but 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?
One year ago, for instance, CAPS player hammerbearcat shared these bearish thoughts on Fifth Third Bancorp:

Much of their growth from the 1990's came from purchasing small banks and using their own high P/E stock to fund the sale. Now they can't buy anyone because their stock is low and their internal growth is below average.

Not surprisingly, Fifth Third Bancorp is down a depressing 75% since that call. In fact, yesterday's drop came after mounting mortgage-related losses forced the regional bank to slash its dividend and raise at least $2 billion.

The bearish takeaway?
Learn how to spot a serial acquirer. There are lots of ways a company can grow, but the "growth-by-rabid-acquisition" strategy is one that Fools should disdain. As CAPS' hammerbearcat understands, an ever-expanding empire of new companies might seem impressive on paper, but it could turn into a house of cards quickly.

The final Foolish move
Investors often focus on stock price movements without realizing that developing a proper stock-picking process counts most.

Over time, consistently reverse-engineering winning -- and losing -- stocks will help you become a more Foolish investor. At Motley Fool CAPS, more than 110,000 investors are Foolishly sharing insightful investment tips to help, above all else, identify tomorrow's big movers.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!