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 top ratings of four or five stars.

Without further ado:

There's a reason why I selected those notable gainers as opposed to other winners making noise on Wednesday, like low-rated financials Morgan Stanley (NYSE:MS) and Citigroup. 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, 91% of the 519 members who've rated DreamWorks have a bullish opinion of the stock. Last May, one of those Fools, robcat2075, explained why the animated film maker seemed like a smart way to buy into some blockbusters:

The buzz on "Kung Fu Panda" is unusually good for a [DreamWorks] film, even among artists who tend to deprecate talking animal movies. … "Madagascar 2" should do well this fall and will benefit from the good will from 1.

Of course, shares of DreamWorks surged yesterday after its first-quarter profit more than doubled on strong DVD sales of Madagascar: Escape 2 Africa and Kung Fu Panda -- just as CAPS' robcat2075 had predicted.

The bullish lesson?
Sometimes, it pays to believe the buzz. As CAPS' robcat2075 demonstrates, when a company's success is predicated on putting out smash hits, it's really not necessary to overthink the investment. As long as you understand the business model and don't pay too high a price, buying into pipelines with plenty of positive reviews can be an easy (and simple) way to outperform.

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

Here are five of Wednesday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in five-star stock RF Micro Devices (NASDAQ:RFMD) may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In January, for instance, CAPS All-Star minnjim1 seemed puzzled over Panera Bread's price performance:

[Panera] has surged 30% in a year when its store traffic actually declined and most of its increased revenue was due to menu price increases. Add to that a P/E of 25 and 30% of [Panera] shares shorted, and I see a declining price ahead.

Consistent with that call, shares of Panera sank yesterday after the bakery-cafe operator posted 40% quarterly profit growth, yet still managed to disappoint investors.

The bearish takeaway?
Implicit in a stock's price are very specific growth and risk assumptions. Therefore, it's your job as an investor to assess whether those assumptions are reasonable, given the company's business model and outlook. As Warren Buffett reminds us, "Investors making purchases in an overheated [stock] need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

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!