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 and not other big-name winners making noise on Wednesday, like one-star mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 89,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, of the 3,046 CAPS players who've rated two-time Motley Fool Hidden Gems pick Portfolio Recovery Associates, 98% are bullish. Fueled by that massive Foolish support, the purchaser of defaulted consumer debt has kept a perfect five-star rating for more than six months straight.

A couple of weeks ago, CAPS All-Star dhd1491 touched on the general sentiment surrounding the stock:

Large new debt purchases will fuel profit gains for years to come as they season. Experienced, savvy management is seeing opportunities galore in the debt buying markets, yet the stock is beaten down as investors jettison any stock remotely related to debt/lending/personal finances.

After plunging almost 30% over the first two weeks of January, Portfolio Recovery has "recovered" about 50% since.

The bullish takeaway?
Take advantage when Mr. Market throws an attractive baby out with the bathwater. When things get shaky, investors tend to sell stocks haphazardly, based simply on the sector they belong to, rather than taking things on a case-by-case basis. Our CAPS community has long believed that PRAA would not only survive, but thrive, in all of the credit mess, so the stock's slide in the latter half of 2007 provided Fools with an awesome opportunity.

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 although yesterday's drop in highly rated Nokia (NYSE: NOK) might have caught our community off guard, 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?
In June 2007, for instance, CAPS All-Star TheGarcipian shared some frightening figures on Evergreen Energy:  

Profit/operating margins are -130% and -143%, respectively. RoA=
-14.3% and RoE= -27.2%. Revenue is jumpy/uneven. No debt (nice) but it's rearranging chairs on the Titanic. Unless they can turn red ink into black oil, this company is on its way out.

Not surprisingly, shares of the clean-coal technology provider have fallen a gut-wrenching 75% since that call.

The bearish lesson?
Don't get burned by cash burn. Investing is all about putting money up front today in order to get more of it back tomorrow. If a company habitually bleeds cash at a rapid pace, chances are you won't see a return of your capital, much less a return on your capital -- no matter how "world changing" its technology appears to be.

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

At Motley Fool CAPS, thousands of investors share 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!