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:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Wednesday, like one-star airline stocks UAL and AMR. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 92% of the 607 members who've rated Motley Fool Stock Advisor pick DreamWorks have a bullish opinion of the stock. In early July, one of those Fools, MethodlessMan, highlighted the animated movie house as a must-see opportunity: "With such a low market cap and all of the promoting they do, one major blockbuster can potentially create earnings equal to 10% of the company value. If they can, over time, become half the company Disney (NYSE:DIS) has, this is an 8-bagger."

Shares of DreamWorks are up over 40% since that call. In fact, yesterday's pop came after a Wall Street analyst upgraded the stock on high "franchise value" expectations for its upcoming film "How to Train Your Dragon" -- consistent with MethodlessMan's outperform pitch.

The bullish lesson?
Learn to combine the best of both value and growth investing worlds. By seeking rapidly growing companies at cheap prices, you not only buy into a stock trading below its fair value today, but you also own a business that can increase that value tomorrow. As Warren Buffett reminds us, "Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now."

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 highly rated GameStop may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
On Monday, for instance, a comment from Radian Group -- CFO Bob Quint said delinquencies are coming in lower than expected -- caused CAPS All-Star DarthMaul09 to raise an eyebrow:

If the price of the stock goes way up on the best news possible, then any other news in the future will likely cause this stock to fall. ... If you look up from your computer screen or newspaper, do you see foreclosures increasing or decreasing? I'll give you a hint, which way is unemployment going?

Following yesterday's loss, DarthMaul is off to a strong start with that bearish call.

The bearish takeaway?
Never confuse a one-day pop with a multiyear trend. If a company's underlying fundamentals continue to deteriorate, short-term bouts of irrational exuberance can last for only so long. As Buffett observes, "For some reason, people take their cues from price action rather than from values. ... The dumbest reason in the world to buy a stock is because it's going up."

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 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!