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 top ratings of four or five stars:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Wednesday, like one-star stock Ambac Financial: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 140,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 94.6% of the 262 All-Star members who've rated Motley Fool Rule Breakers selection Shanda have a bullish opinion of the stock. In late September, one of those Fools, Ragingsamosa, helped our community connect with the online gaming company: "Very profitable; decent pipeline of games; lots of cash on hand; has a hand in various industries likely to experience a lot of growth (gaming, online entertainment, literature); based in China and has a business model that may eventually be portable to other foreign countries."

Following yesterday's pop, Ragingsamosa is beating the market nicely since that call.

The bullish lesson?
Know when to break the rules. High-growth stocks in emerging markets are notoriously fraught with risk, but by seeking those with a strong leadership position and solid balance sheet, you can reduce your downside substantially. As Warren Buffett recommends, "Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

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

Here are five of Wednesday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in five-star stock Dolby Labs may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Two months ago, for instance, CAPS All-Star BSHumphreyII warned Fools about STEC's seemingly steep valuation:

STEC is a pretty solid company in general, but the stock is overvalued now. The market looks like it's going into price consolidation right now, and that tends to hit hot stocks like this one much harder than others. ... It might be worth another look later this fall, but now definitely isn't the time to buy. The same goes for other fast-growing, high PE stocks.

Shares of the data-storage specialist have already fallen by more than 60% since that call. Of course, most of that plunge came yesterday, on a weak fourth-quarter outlook, as one of STEC's largest customers, EMC (NYSE:EMC), continues to work through excess inventory.

The bearish takeaway?
Never mistake a solid business for a solid stock. As CAPS' BSHumphreyII understands, even the greatest of companies can disappoint Mr. Market if its valuation already reflects much of that greatness. As Buffett says, "Investors making purchases in an overheated [stock] need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

The final Foolish move
Investors often focus strictly on stock price movements, without realizing that developing a proper stock-picking process counts most.

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!