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, such as low-rated Dell (NASDAQ:DELL). 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, 97.5% of the 1,015 All-Star members who've rated AOB have a bullish opinion of the stock. Late last month, one of those top Fools, Fourtrak, highlighted the company's recent earnings decline as a can't-miss opportunity:

It was apparent it would be rare for them to meet expectations, so I expected a drop and got it. … I see it doing well once the economic jitters are out of the way, and as long as they get a handle on expenses, it looks like they misread the economy and spent far too much for the level of sales they got. It appears to me to be a mistake made by management, but certainly fixable.

Including yesterday's market-bucking pop, shares of the traditional-Chinese medicine maker have already risen by 25% since that call.

The bullish lesson?
When the shares of a solid business take a dive, always try to figure out why. If the reasons for the drop, in your own opinion, are just short-term in nature and should be worked out over time, then it might be a good opportunity to buy quality on the cheap. As Warren Buffett reminds us, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

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 Allied Irish Banks may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
CAPS member mitp, for instance, seemed highly skeptical of China BAK's rumor-fueled price surge this past Tuesday: "[A]fter Briefing.com said it is "hearing chatter" that [China BAK's] lithium polymer batteries will power [Google's (NASDAQ:GOOG)] upcoming Nexus One smartphone. Until more official reports surface, investors can chalk the spike up to speculation after a nearly three-month slump for the stock."

Consistent with that warning, shares of the lithium ion battery maker plunged by more than 20% yesterday, after CFO Tony Shen dispelled those rumors in an interview with Bloomberg.

The bearish takeaway?
Never confuse an improving price with improving prospects. If a company's underlying fundamentals continue to deteriorate, short-term, speculative run-ups 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 retire wealthy.

Log in to CAPS today, and start participating. It's absolutely free -- and a lot of fun!