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 a top rating of five stars.

Without further ado:

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

Our community of more than 125,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 98% of the 3,234 who've rated Activision Blizzard have a bullish opinion of the stock. Four days ago, one of those members, Macsblow, explained why the video game publisher seemed like a particularly timely play:

The video game industry as a whole seems weak, so this would be an ideal time for [Activision] to slip ahead. Video game giants [Electronic Arts (NASDAQ:ERTS)], Atari and [Midway Games] are all struggling to keep their products while [Activision] has a whole list of titles that should be of great anticipation for most gamers in 2009. ... Overall, this is a solid company with low debt, high revenue and should be a safe investment for the next few years

Consistent with that call, shares of Activision surged yesterday after a Wall Street analyst upgraded the stock, writing that with "a meaningful portion of the top 20 selling games, we believe that Activision is taking share and has outperformed its peer group by a wide margin."

The bullish lesson?
When searching for value in struggling industries, "good" is almost never enough. As CAPS' Macsblow understands, the key to dumpster diving is buying into 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 are tough, it's crucial to stick with the leader.

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

Here are five of Wednesday's biggest one-star decliners:   

While yesterday's shocking news out of highly-rated Satyam Computer (NYSE:SAY) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
One year ago, for instance, CAPS All-Star arbitare was already warning our community about Wynn Resorts, and specifically, its desert hometown:

Las Vegas will die a slow death. Every state wants gambling revenue, so will broke Americans drive / fly all the way to Vegas or drive 20 minutes to the Indian or River Boat Casino to lose their money? … Guess what? P/E at 84? Cash out your chips and get out.

Shares of the casino operator are down 56% since that call. In fact, yesterday's drop came as an analyst predicted that Las Vegas casinos would continue to struggle in 2009, and that regional markets would benefit as a result -- exactly as CAPS' arbitare had warned.

The bearish takeaway?
Get out of dangerous neighborhoods while you can. Just as companies with very little product diversification should give Fools some pause, those that are overly exposed to just a few geographic regions should cause concern. When the town is booming, geographic risk might seem trivial, but as Wynn demonstrates, any material bust in that area could sink investors in the process.

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! 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool’s own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.