Wednesday's Biggest Stock Stars

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 why I selected notable five-star gainers, as opposed to other big-name winners making noise on Wednesday, like one-star stock Blockbuster (NYSE:BBI). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 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 the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 95% of the 431 CAPS All-Stars who've rated EMC have a bullish opinion of the stock.

Three days ago, one of those All-Stars, Murkyl, explained why the data storage specialist looked particularly trendy:

I think the future looks good for storage companies. Everything is going online and going the streaming route. Video, music, video game downloads. All these hosted solutions require large amounts of storage and EMC is one of the players (including [IBM (NYSE:IBM)] and [Hewlett-Packard]) that stand to gain a lot from this trend.

Consistent with that call, shares of EMC bucked yesterday's market downtrend after posting better-than-expected third-quarter results, as demand remained surprisingly strong in the face of a slumping economy.  

The bullish lesson?
The sky isn't falling for all businesses. As CAPS' Murkyl demonstrates, you can always find pockets of opportunities where demand should hold up -- at least reasonably well -- despite the ailing economy. For Foolish investors willing to take the time to find superior business trends at rock-bottom prices, getting through massive market slumps is certainly possible.

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:  

While yesterday's gut-wrenching drop in five-star health insurer Coventry Health Care (NYSE:CVH) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In February 2007, for instance, CAPS member FoolforSilver was already raising red flags about Fortress Investment Group:

Massively overvalued hedge fund. Trading at approximately 30x earnings, which leaves little room for error. They are paid on % of assets and % of gains. When gains disappear(everyone loses every once in a while), investors bail, profits dry up, and the stock tanks. No track record to justify their price.

Not surprisingly, shares of the asset manager are down an ugly 85% since that call.

The bearish takeaway?
As CAPS' FoolforSilver demonstrates, you should always try to anticipate the chain of events that might lead to your stock being squashed. One of the biggest mistakes we make as investors is failing to consider second, third, and higher-order effects when analyzing a company's risk exposures. Like 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!