Wednesday's Biggest Winners and Losers

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:

Company	Yesterday's Gain
Shanda Interactive Entertainment (Nasdaq: SNDA)	9.42%
ICO (Nasdaq: ICOC)	5.42%
Umpqua Holdings (Nasdaq: UMPQ)	5.31%
Mueller Water Products	3.79%
NYSE Euronext (NYSE: NYX)	3.39%

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Wednesday. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, an overwhelming 95% of the 221 CAPS All-Stars who've rated Motley Fool Rule Breakers pick Shanda Interactive have a bullish opinion of the stock.

In late June, CAPS All-Star mm20001 explained why the Chinese online gaming company seemed like a perfect play:

SNDA is cheap with a 12-trailing-months P/E of 11, and $6 per share in cash (they're trading in the high 20s). They have beaten analysts' estimates for the past quarters, and seem well on their way to 15% earnings growth for the next few years. At current levels buyers should profit from a combination of rising earnings and expanding P/E multiple.

In line with that call, shares of Shanda surged yesterday after the company's second-quarter earnings topped Wall Street's estimates yet again, driven by a healthy 48% rise in revenue.

The bullish lesson?
Learn to combine the best of both value and growth investing worlds. As long as you make it a point to never overpay for growth, buying into profitable small caps with ever-expanding market opportunities -- a la Shanda -- is a proven way to achieve long-term, market-thumping gains. As Warren Buffett once wrote, "Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

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:  

Company	Yesterday's Loss
Pier 1 Imports (NYSE: PIR)	9.23%
Hoku Scientific	4.81%
China Finance Online	4.23%
US Airways (NYSE: LCC)	3.17%
AMR (NYSE: AMR)	3.13%

One-star stocks inspire the least confidence in our CAPS members, and for pretty good reason: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In April, for instance, CAPS member ANALYST10 shared some skepticism over the plan at Pier 1 Imports:

Latest (4-10) Earnings Report unconvincing in terms of a true turn-around...It's just marginally better than the past 3 years of increasingly horrid results due to write-downs, closings etc.

What makes this Retail stock's (economy/recession) outlook much worst than most stores is its direct-correlation to the housing market, which will remain in the [D]umpster for quite sometime.

Not surprisingly, shares of the home-furnishings retailer are down 45% since that call. In fact, yesterday's fall came after the company announced that its second-quarter same-store sales dropped 1.7%, and that margins slipped on continued markdowns -- consistent with ANALYST10's warnings.

The bearish takeaway?
If you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife can certainly be profitable, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote, it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

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!