Wednesday's Hottest Stocks

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 Toyota Motor (NYSE: TM). 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, 93% of the 777 members who've rated Autodesk have a bullish opinion of the stock. About a year ago, one of those Fools, NollierCapMgmt, explained why the stock looked designed for performance:

[Autodesk] is a cash cow which generates a ton of [free cash flow]. Additionally, it sports no debt. Its competitive advantage or moat is its CAD software which helps to promote high switching costs. [Autodesk] is very good at annuitizing its business.

Shares of the design and engineering software maker are up more than 76% since that call. In fact, yesterday's double-digit pop came after Autodesk's fourth-quarter results topped analyst estimates on significantly improving demand.

The bullish lesson?
Always be on the hunt for massive economic moats. A sustainable advantage is one of the key indicators of long-term success, so if you've identified one of the more powerful ones at work -- invaluable intangible assets, cost advantages, network effects, or in Autodesk's case, high switching costs -- you might be on to something. As Warren Buffett once said, "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."

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 Transocean (NYSE: RIG) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In 2008, for instance, CAPS All-Star IBleedConcrete brought H&R Block's taxing situation to our community's attention:

Declining sales: check.
Holds bad debt: check.
PEG of ~4: check.
Stock price inexplicably jumping after they record only 4% customer growth: check.

Shares of the tax preparer are down 16.7% since that warning. In fact, yesterday's market-bucking plunge came after H&R Block warned that its 2010 earnings would disappoint as more and more customers look to prepare their own taxes due to the weak economy.

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

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