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 stocks with a top rating of four or five stars:

There's a reason why I selected those notable gainers, as opposed to other winners making noise on Wednesday, like low-ranked Sun Microsystems (NASDAQ:JAVA). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 130,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 9.43% of the 2,344 members who've rated E*Trade have a bullish opinion of the stock. In late October , one of those Fools, methusalaw, explained why the online brokerage seemed to be bouncing back:

[E*Trade] has been quietly performing a solid recovery while accelerating its core business (online brokerage) over its peers. It has been building its cash balance and provisions against its mortgage portfolio, while its mortgage portfolio is performing better than most others in the business.

Consistent with that call, shares of E*Trade surged more than 40% yesterday, on data that showed early delinquencies in its credit-portfolio declined in both January and February.

The bullish lesson?
If you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife can certainly be profitable, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote (and CAPS' methusalaw demonstrates), it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are five of Wednesday's biggest decliners with a one- or two-star rating:  

While yesterday's drop in highly rated food stocks General Mills and Kraft may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Last month, for instance, CAPS member retry77 explained the decision to cash out of MGM Mirage:

MGM is a scratch for 2009. I bought what I thought was the bottom $12 in Jan. Today I dumped it for $7. City center venture has already canceled the condo building. MGM is in heavy debt with this project. May be forced to sell more assets. December I'll look at MGM again.

Shares of MGM are already down a depressing 60% since that call. In fact, yesterday's drop came after the company's fourth-quarter loss of $1.1 billion fueled investor worries about how it would relieve its liquidity issues.

The bearish takeaway?
Never care about where a stock has been -- only where it's headed. One of the biggest mistakes investors make is holding on to a stock long after their original investment thesis has fallen apart, all in the hopes of someday "breaking even". Selling out at a loss is never easy, but as CAPS' retry77 demonstrates, it's often the only way to protect the money you still have left.

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!