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:

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 one-star stock Thornburg Mortgage (NYSE:TMA). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 105,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, of the 76 CAPS All-Stars who've rated CREDO Petroleum, only one has a bearish opinion. Fueled by that Foolish support, the small-cap oil and gas company has kept a perfect five-star rating for four months straight.

Last January, CAPS player Sentineneve broke down CREDO's outperform case point-by-bullish point:

A. Managers like owners
The CEO is James T. Huffman. He owns approximately 1.2 of the 9.33 million shares outstanding, or approximately 13% of the company...

B. Executive Compensation
As of the last [Form 14A], Mr. Huffman was paid a base salary of $135,000 a year, which was established in 2004...

C. Performance
CRED has had significant growth in their balance sheet for the past several years.

II. Company

A. Oil and Gas
CRED has had fourteen consecutive years of record reserve quantities, and is approaching their seventh consecutive year of record production...

B. Calliope
CRED holds a patent in a technology called Calliope... This should be considered the economic moat.

CREDO Petroleum is up a whopping 50% since that call.

The bullish lesson?
The biggest returns come in the smallest packages. As our team at Motley Fool Hidden Gems always says, identifying attractive small caps with growing cash flows, an identifiable competitive advantage, and high insider ownership is a proven way to achieve outsized returns. While most megacap behemoths have their best days behind them, small-cap stocks run by managers with substantial stakes in the business have plenty of room to rocket.

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 although yesterday's drop in highly rated Moody's (NYSE:MCO) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Two weeks ago, for instance, CAPS player Cicciano aired out this bearish underperform pitch on AMR:

Soaring fuel costs sagging economy weak dollar labor costs = bad time for airline stocks. and American is too big and clumsy to react in good fashion. what was its latest bird-brained idea? Taking tips from its curbside attendants by charging $2/bag for curbside check-in... No thanks.

Consistent with that call, shares of the entire airline sector nosedived yesterday, after AMR said it would continue to cut jobs, reduce capacity, and indeed add a new bag fee ($15 for passengers' first checked bag) to counter soaring fuel costs.

The bearish takeaway?
Always protect your portfolio from airline sickness. Some industries just naturally lend themselves to shareholder wealth-creation, but unfortunately for investors, the airline business has never been one of them. As Warren Buffett once wrote, "For investors, it would have been far better if Orville had failed to get off the ground at Kitty Hawk."

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, above all else, 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!