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 Sony (NYSE:SNE). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 100,000 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 72 CAPS All-Stars who've rated CommVault Systems, only two have a bearish opinion. Fueled by that support, the New Jersey-based provider of data-management software applications has kept a four- or five-star rating for more than six months straight.

Late last March, CAPS player rockynoggin shared some unique insights into the company: "My company uses this product -- far superior to other players in this space. Once they get a good foothold in large enterprise shops they will take off."

Consistent with that call, shares of CommVault surged yesterday after the company's fourth-quarter results topped Wall Street's forecasts, driven by increased market penetration and strong demand for its Simpana Software Suite.

The bullish lesson?
Never stray from your circle of competence. As CAPS' rockynoggin showed, one of the best ways to gain an informational edge on Wall Street is by focusing on industries with which you're already familiar. As value guru Mohnish Pabrai said in a recent interview: "Most people, if they really think about it, have a business or an industry or two that they understand very well. ... People get into trouble when they work in a bank and they want to invest in Google."

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 Deere (NYSE:DE) 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 last month, for instance, CAPS All-Star floridabuilder posted this bearish reply to a BankAtlantic bull: "[M]y red thumb on this was more due to information regarding their package of residential loan portfolios that was getting a bid well below 20 cents on a dollar ... they are going to take a significant hit on their residential loans and they either need a capital injection or they will become insolvent."

Shares of the Fort Lauderdale, Fla.-based bank are down about 25% over the last month. In fact, a couple of weeks ago, BankAtlantic posted a first-quarter loss of $23.4 million on hefty mortgage-related charge-offs -- right in line with floridabuilder's take.     

The bearish takeaway?
Figure out a company's financials before they come back to harm you. By carefully watching out for a few common red flags, you'll be ahead of most investors in being able to predict significant, and possibly disastrous, charge-offs. As CAPS' floridabuilder shows once again, there's really no substitute for thoroughly understanding a company's business model if you plan to avoid permanent losses.

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