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 that have a top rating of five stars.

Without further ado:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday -- like Pacific Ethanol (NASDAQ:PEIX) -- is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?    

Our community of more than 78,000 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: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, all 144 CAPS players who've rated ICON PLC are bullish. Fueled by that unanimous Foolish support, the Irish provider of drug development and research services has maintained a five-star rating for more than six months straight.

This bull pitch -- by CAPS All-Star slo1111 back in December 2006 -- touched on ICON's seemingly massive potential:

We are on the eve of drug development in ways we are only imagining. Companies like Icon help drug companies handle the logistics of clinical trials, which allows larger pipelines. It is a competitive business and cash flows are nothing to brag about, but Icon has proven itself as a strong outsource partner and will reap the rewards for drug and delivery technology.

ICON has returned an impressive 59% since that call. In fact, yesterday's pop came after the company said it expects 2008 revenues and profit to exceed its financial forecasts for 2007 by more than 20% -- consistent with slo1111's optimistic outlook.

The bullish takeaway? Investigate the different angles when looking to play a particular trend. Often, companies that stand to benefit most from a certain technology aren't the ones that provide it, but instead support its development to market. They might even offer an attractive way to ride a strong industry tailwind without having to bet specifically on the products themselves. 

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 Heartland Payment Systems (NYSE:HPY) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Hovnanian Enterprises bear call -- by CAPS All-Star TheGarcipian -- from July:

While it's nice to see that insiders hold 12.5% of the stock, it makes me very nervous that a company with such a huge market cap ($1.1B) has so tiny a hard-cash backup (only $10M), with a high D/E ratio of 141%. Should hard times fall, as they are now in the Northeast building sector, this company is going to struggle mighty hard to pay operating expenses until it can sell more houses.

The New Jersey-based homebuilder is down 57% since that pitch. In fact, yesterday's 11% tumble came after the company posted a wider-than-expected fourth-quarter loss of $466.6 million, as the residential housing market continued to deteriorate -- just as TheGarcipian had warned. 

The bearish lesson? Know your scenarios. One of the most common mistakes investors make is failing to consider all of the possible outcomes of an investment -- with the absolute worst-case being the most critical. By focusing your research on how much you can lose and not on how much you can make, you put yourself in a very good position to sidestep serious losses.  

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!