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 low-rated financials Citigroup (NYSE:C) and JPMorgan Chase. 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 after 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 245 All-Star members who've rated II-VI have a bullish opinion of the stock. Last month, one of those Fools, tenmiles, pounced on the laser component maker's beaten-down stock price:

Using today's sell-off to go long small cap IIVI. Strong balance sheet, attractive historical ROE - trading around 10x reduced forward earnings - looks like good long-term value around current $14.46 for investors with 3-5 year horizon.

II-VI is up 32% since that pitch. Of course, the majority of that gain came yesterday after the company's third-quarter profit and full-year guidance topped Wall Street's expectations -- consistent with tenmiles' call.

The bullish lesson?
Learn to capitalize on Mr. Market's short-sightedness. Going against the herd isn't always easy on the stomach, but if you truly believe in a company's long-term tailwinds, a sharp sell-off can offer the very best entry points. As Warren Buffett once remarked, "Only for short-term investors and market timers is a correction not an opportunity."

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 drop in five-star stock Allegheny Technologies (NYSE:ATI) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months after CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS member epmccart shared these bearish thoughts on AMR (and other one-star airliners):

Besides the laundry list for not investing in airlines at all (umm, let's see: oil money, less spending money in a recession, huge overhead costs, terrorism fears, etc...), the big airlines - Continental, United, Delta, and the like - have been dragging for years. And now they have fresh competition even WITHIN the industry, like JetBlue and [Southwest Airlines], to deal with - companies that are cheaper, friendlier, younger and more agile - and who don't necessarily charge you an extra $25 to check a single bag.

Consistent with that call, shares of several one-star airline stocks were shaken yesterday after AMR and UAL posted quarterly losses of $340 million and $1.3 billion, respectively.

The bearish takeaway?
Always protect your portfolio from airsickness. Unless you have the utmost confidence that a specific airline can indeed sustain superior returns on capital -- be it through differentiation or a low-cost structure -- the cutthroat nature of the industry makes it extremely difficult to make a decent long-term buck. In Warren Buffett's words, "You've got huge fixed costs, you've got strong labor unions, and you've got commodity pricing. That is not a great recipe for success."

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 into CAPS today and start participating. It's absolutely free and a lot of fun!