Wednesday's Biggest Winners and Losers

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Wednesday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason I selected notable five-star gainers, as opposed to other big-name winners making noise on Wednesday. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, out of the 422 CAPS All-Stars who've rated the oil and gas company VAALCO Energy, an overwhelming 98% have a bullish opinion.

In March, CAPS All-Star tshillam helped bring the small-cap opportunity to our community's attention:

This small oil and gas exploration, and mining company, has a great [price-to-earnings] ratio, proven oil reserves on hand, solid and consistent growth over the past 5 years. Recently a major shareholder urged the sale of the company, and this company may find itself in a position where investors are given a premium for their investment. Nonetheless, this company has demonstrated solid performance ...

Shares of VAALCO have risen by an impressive 37% since that call.

The bullish lesson?
Don't be afraid to go small. By focusing on attractive small caps that are doing big things underneath Wall Street's radar -- like building proven reserves and taking shareholder-friendly actions -- you can consistently find stocks that are inefficiently priced. Once that progress translates into visible earnings growth, the company's following -- and its stock price -- will probably get a nice boost, too.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Wednesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS members, and for pretty good reason. Since CAPS started, one-star stocks have dropped by an average of 11.4%, annualized.

Did CAPS call the fall?
CAPS member blade5adj, for instance, already has a comment waiting for our community regarding yesterday's drop in General Motors: "I think the [Moody's] downgrade, putting the debt below investment grade, will be a serious problem for the company. Although this company isn't as highly leveraged as Enron was, when you look back, it was their debt getting downgraded below investment grade that put the gears in motion to bring them down."

The bearish takeaway?
As blade5adj reminds us, investors need to pay attention to risk and effect in its totality. One of the biggest mistakes we make is failing to consider second, third, and higher-order effects when analyzing a company's risk exposures. As Charlie Munger once wrote, "This defect is quite understandable, because the consequences have consequences, and the consequences of the consequences have consequences, and so on."

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!