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 low-rated AIG (NYSE:AIG). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 150,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 97% of the 2,422 members who've rated Motley Fool Stock Advisor selection NetGear have a bullish opinion of the stock. One year ago, one of those Fools, oneilldp, helped our community stay connected to the stock:

This company makes good products and has a lot of cash to survive the down turn. ... The company has good management and is conservative, which will benefit them in a year or two when demand picks up and many competitors go out of business. Sales may stay down for a while, but they will pick up eventually and [NetGear] will gain market share and increase profit margins.

Shares of the networking equipment maker have more than doubled since that call. In fact, yesterday's pop came after posting better-than-expected quarterly results fueled largely by market share gains in the U.S. -- just as CAPS' oneilldp predicted.

The bullish lesson?
When searching for value in beaten-down industries, "good" is almost never enough. Like oneilldp understands, the key to dumpster diving is finding cash rich, best-of-breed businesses that actually stand to benefit from an industry shakeout (by growing market share at the expense of weaker competitors). Sometimes, we can get away with investing in second-rate companies, but when times get tough, it's important to stick with the leaders.

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 plunge in highly rated steel stocks ArcellorMittal (NYSE:MT) and U.S. Steel may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In a reply pitch from late last year, for instance, CAPS All-Star audiocat strongly advised Fools to hang up on Sprint:

This company is losing market share, has a bad reputation with consumers, and has nothing to compete with iPhone. Yes, the Pre is not a bad piece of technology, but it simply cannot compete with Apple's (NASDAQ:AAPL) juggernaut. Take a look at Sprint's retail stores, and then take a look at AT&T's (NYSE:T), you'll know what I'm talking about then.

Consistent with that warning, shares of Sprint plunged yesterday after posting a fourth-quarter revenue decline of 7% as the telecom giant was forced to sign up more lower-paying customers to help curb subscriber losses.

The bearish takeaway?
Never underestimate the protection that a competitive advantage provides. Having a powerful moat is what ultimately drives superior returns on capital, so unless you can clearly identify how a given company has an edge on its rivals, it's probably best to stay away. As Warren Buffett reminds us, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

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!