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 I selected notable five-star gainers, as opposed to other big-name winners making noise on Wednesday, such as low-rated Radian Group (NYSE:RDN): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 754 members who've rated Motley Fool Stock Advisor pick Medco Health Solutions have a bullish opinion of the stock. Late last month, one of those members, RXDOC73, explained why the pharmacy benefits manager looked particularly trendy: "The population is just getting older and more people are going to need more drugs. There is a great deal of consolidation in the field and only the strong companies like this one will survive the fallout."

Consistent with that call, shares of Medco popped yesterday following strong earnings news. The company posted third-quarter net income growth of 38% on strong mail-order and generic prescription sales, and it forecast continued double-digit growth for 2009.

The bullish lesson?
Let the (demographic) trends be your friend. By identifying excellent companies positioned to capitalize on powerful demographic tailwinds -- just as CAPS' RXDOC demonstrated -- you'll always have market-trouncing forces working in your portfolio's favor. As my Foolish colleague Todd Wenning once recommended, "Rather than speculating on events that may or may not happen, I offer you one trend that's sure to happen -- the aging of the baby boomer generation."

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:   

Although yesterday's drop in five-star stock Suntech Power (NYSE:STP) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months after CAPS' start, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In the spring of 2007, for instance, CAPS All-Star MCKIrobert was already giving a bearish heads-up on General Growth Properties: "I agree with the sentiment that the P/E ratio is just too high, even for a company with "Growth" in the title! Maybe that's what worries me the most ... oh wait, no, it's the fact that they're in a sector that's going to get slammed in the next 5 years."

Shares of the investment trust for commercial real estate -- malls, mostly -- have fallen by a whopping 96% since that call. In fact, yesterday's 50% plunge came after the company reported a wider quarterly loss, lowered its full-year forecast, and said it needs to refinance $900 million of debt coming due at the end of the month. 

The bearish takeaway?
Learn to manage your expectations. Embedded in a stock's price are very specific risk and earnings assumptions, and it's your job as an investor to question whether those assumptions are justified. As MCKIrobert understands, when a company's balance sheet and long-term industry outlook don't exactly jibe with a lofty stock price, it's best to stay skeptical.

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!