Wednesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Wednesday's biggest gainers among stocks with a top rating of five stars.

Without further ado:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Wednesday, like Sony (NYSE: SNE). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 80,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess. Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, out of the 265 CAPS players who've rated ICF International so far, only one has chimed in with an underperform call. On the strength of that huge Foolish support, the Virginia-based consulting firm has maintained a perfect five-star rating for more than six months straight.  

This bull pitch -- by CAPS player dm982 back in July -- gives us some insight into our community's thought process:

Anyone in the business world knows what a gold mine consulting is for the consulting company ... These guys keep winning big contracts and they appear to be focused in some good consulting fields that governments (the most unfocused and unorganized business of them all) need and will pay for.

ICF International is up 20% since that call, and it's returned a massive 80% over the last year. In fact, yesterday's pop came after a Wall Street analyst cited the positive impact that an upward revision to ICF's largest contract, a $912 million deal to help provide grants for Katrina victims, should have on its bottom line. That's pretty consistent with dm982's comments.

The bullish takeaway? Pay attention to small caps that make a habit of winning big contracts. Just a few major deals can have a huge impact on a little company, so focus on reputable firms with big industry trends working in their favor. If those tailwinds are strong enough, blockbuster contracts will probably keep blowing in that company's direction.  

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

Here are Wednesday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's drop in five-star stock Petrobras Energia Paticipaciones (NYSE: PZE) may have caught our community off-guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this PMI Group bear call -- by CAPS player chroot -- last November:

The bond-insurance business is in trouble in general. PMI, one of the last insurers to fall spectacularly, is also one that has the furthest to fall. Its exposure to the sub-prime business is immense. Their entire business has dried up, and the number of defaults reaches staggering new highs every month, with no end currently in sight.

Not surprisingly, the California-based mortgage insurer is down 41% since that pitch, with yesterday's drop resulting from even more worries over rising delinquencies -- just as chroot had warned.  

The bearish lesson? What goes down doesn't have to come back up. Trying to catch a falling knife can be profitable, but only if you can conclude -- with a reasonable amount of certainty -- that the price already has the worst-case scenario baked into it. If a company's industry and financial picture are just so hazy that it's impossible to run a sensible valuation, there's no telling how low the stock can go. 

The final Foolish move
Investors often focus strictly on stock price movements (or the results), 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!