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 the 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 low-rated techs Advanced Micro Devices (NYSE: AMD) and Research In Motion. Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 83,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Over the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, of the 199 CAPS players who've rated Oil States International, more than 97% have a bullish opinion. Fueled by that Foolish support, the Texas-based oilfield services provider has maintained a four- or five-star rating for the last six months straight.

This outperform pitch by CAPS player theotherjimmac back in late 2006 touched on Oil State's stately growth rates:

Flipflopping around with the price of oil, but growing strongly at 50% clip with pipes, accommodations, etc. for oil industry. Big presence in Canada's oil sands region ... [It] is churning out strong earnings growth, and their strong earnings seem likely to eventually get the stock back to 10x [trailing-12-month earnings per share].

Oil States International is up 58% since that call. In fact, yesterday's pop came after management reported better-than-expected fourth-quarter results, while also issuing first-quarter guidance above Wall Street's estimates. Oil States shares closed the day at a trailing P/E above 10 -- consistent with theotherjimmac's prediction.  

The bullish takeaway?
Growth is great ... especially when it's cheap. Oftentimes, Wall Street remains anchored to a specific set of estimates and fails to fully discount a stock's true potential. When that happens, Fools stand to benefit from the underlying earnings growth and from an expanding multiple when Mr. Market decides to "pay up" for those profits.

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 in our CAPS players. So while yesterday's drop in highly rated Garmin (Nasdaq: GRMN) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Back in February 2007, for instance, CAPS All-Star TMFMattyA communicated these bearish musings on Mediacom Communications:

Generally, the cable business tends to be a good one with steady cash flows and limited competition; unfortunately, Mediacom is suffering from waning subscriber numbers, poor customer service, and weak cash flows; all this, and a monster debt load that keeps growing; sure-fire recipes for underperformance.

Shares of the New York-based cable television operator are down 47% since that call.

The bearish lesson?
Always focus on the cash flow. Investing is all about putting money out today in order to get more of it back tomorrow. So, if a company's cash flow production is weak and it has a ton of debt to boot, you'll be hard pressed as an investor to see a return of your capital, let alone a return on your capital.

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!