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 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 tech stocks Research In Motion (NASDAQ:RIMM) and salesforce.com. 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 proven 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 97% of the 196 CAPS All-Stars who've rated engineering and construction company Foster Wheeler have a bullish opinion of the stock.

Just two days ago, CAPS member GGGilmore helped our community stay focused on Foster's fundamentals:

This great company is oversold. It may continue to go down in the short term until we find the bottom of the recent decline in the oil [and] natural gas prices, which we may not find until we find the bottom of the recession. When the world economy kicks in again and demand increases, this will be one of the companies to own. I thought I would jump in now at a great price rather than trying to find the absolute bottom.

With the help of yesterday's pop, CAPS member GGGilmore is off to a nice start with that call.

The bullish lesson
When a good business gets cheap, the big mistake is not taking full advantage of the opportunity. By trying to time a stock's absolute bottom (a fruitless endeavor, to be sure), you run the risk of not owning a meaningful amount of a quality company if the price starts to fly away.

As Warren Buffett once wrote when describing his purchase of Coca-Cola:

"We have had depressions. We have had wars. Sugar prices have gone up and down. A million things have happened. How much more fruitful is it to think about whether the product is likely to sustain itself and its economics than to try to be questioning whether to jump in and out of the stock?"

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 five-star stock Melco Crown Entertainment (NASDAQ:MPEL) may have caught our community off guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In late January, for instance, CAPS All-Star IBDFool4U shared some sobering thoughts on Raser Technologies:

Assuming NO cost of sales (which is unrealistic), they would have to sell $15 million of licenses this year to simply break even. To justify current market cap at a reasonable P/E of 20, they would have to make $35 million this year (Again, assuming no cost of sales). ...

So you have a company that should run out of cash in less than a year, needing to sell $35 million IN LICENSING FEES, after sales of $250,000 last year, based off of 5-10 guys research (at best), heading into a recession.

Stock may be pumped up in the short term, but as a former mechanical engineer (with extensive knowledge of motors and drives), EASY UNDERPERFORM.

Consistent with IBDFool4U's warnings, shares of the geothermal provider are now down 45% since that call.

The bearish takeaway
Implicit in a company's stock price are very specific cash flow assumptions. Therefore, one of the most important jobs you have as investor is to determine whether they're justified. As CAPS' IBDFool4U mentioned, any company can pop in the short term, but if the expectations aren't rooted in economic reality, it's just a matter of time before your rocket stock "turns torpedo."

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!