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 I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like one-star stocks Beazer Homes (NYSE: BZH) and Krispy Kreme Doughnuts. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 81,000 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: Over the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, longtime Foolish favorite FormFactor has maintained a perfect five-star rating for more than six months straight. Of course, the stock is a two-time selection of our Motley Fool Hidden Gems small-cap service, so our community's positive sentiment is pretty easy to understand.   

This outperform pitch -- by CAPS player WickedSmaht less than three months ago -- commented on the stock's slide in October and the possible bargain opportunity it presented:

This company has a disruptive technology that is at the forefront of its industry. They are ramping up production to meet increasing demand while constantly introducing new products to keep them ahead of the competition. ...

I love it when a stock goes on sale like this. Short-term issues causing analysts to panic and try to beat each other out the door, while smart investors get a bargain.

Consistent with WickedSmaht's view, shares of the chip-testing equipment maker surged yesterday after it got an upgrade. The Wall Street analyst supplying the boost cited a sensible valuation and the company's competitive advantages over its peers -- the same as our community's overall view.  

The bullish takeaway? When the shares of a company you like take a tumble, always try to figure out why. If Mr. Market, in your opinion, is being too short-sighted with his appraisal, it might be a perfect time to buy quality on the cheap. As Warren Buffett once said, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

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 while yesterday's drop in five-star stock Sasol (NYSE: SSL) may have caught our community off-guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped by an average of 16.6%.

Did CAPS call the fall?
Take, for instance, Research Frontiers, a developer of suspended-particle technology, which is used to control the amount of light passing through a device. CAPS All-Star and fellow Fool TMFMattyA made this bear call back in mid-June:

Nice, a $200 million company generating almost $200 thousand in revenue! Somehow, this company has been able to stay afloat by routinely issuing millions of shares to investors who presumably believe in this company's unproven technology. Well, I guess something has to keep paying the high salaries of the company's 11 employees.

Shares of the company have fallen 39% since that pitch.

The bearish lesson? Stop being stupid, and you'll make more money! As regular Fools know, rule No. 1 is to preserve your principal, but betting on a company with unproven products, minuscule sales, a long history of huge share dilution, and a nosebleed valuation is one of the easiest ways to destroy it. With so many sound opportunities out in the market, taking fliers on such suspect stocks is never a good idea.

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, 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.

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