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, such as low-rated telecom Motorola (NYSE: MOT). Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 93,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 1,343 players who've rated Motley Fool Hidden Gems pick Ceragon Networks, 98% have a bullish opinion. Fueled by that Foolish support, the Israeli provider of wireless backhaul solutions has kept a perfect rating for over six months straight.

Two weeks ago, CAPS player northhillcommented on Ceragon's sliding stock price, and the bargain opportunity it offered:

Too cheap not to add to your portfolio now. I agree that possible 5 or 6 bagger over next 5 years is more likely than failure. With price in current range, this company could readily be bought up by a bigger player. This is the level of risk I relish.

Ceragon has already recovered a whopping 38% since that call.

The bullish takeaway?
When your primary focus is risk, the reward usually takes care of itself. CAPS' northhill correctly understood that, all things equal, the lower the stock price (and in effect, price risk), the greater your potential returns. Of course, according to Modern Portfolio Theory, a stock that plunges sharply relative to Mr. Market becomes even "riskier." But as Warren Buffett asks, "Would that description have then made any sense to someone who was offered the entire company at a vastly reduced price?"

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 five-star stock Synaptics (Nasdaq: SYNA) may 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?
Just three days ago, for instance, CAPS player Tastylunch built the following bear case on Beazer Homes:  

The basic macroeconomic problem for Beazer still remains. Housing still stinks, loans are hard to get for prospective buyers and the economy is teetering. I can't see their sales improving at all in '08 barring major geopolitical events

Beazer got the Fed cut "pop" last week now comes the buyer's remorse "drop".

Right in line with Tastylunch's bear call, shares of the beleaguered homebuilder plunged yesterday. The fall followed Moody's decision to downgrade the company's credit rating deeper into junk status, citing the bleak housing outlook and ongoing legal troubles.

The bearish lesson?
Beware of the deadly Dead Cat Bounce. As long as a company's underlying fundamentals continue to deteriorate, short-term, Fed-triggered run-ups can only last for so long. Like Benjamin Graham once said, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

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!