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 telecom Sprint Nextel (NYSE: S). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 97,000 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, all 40 CAPS All-Stars who've rated Teledyne Technologies so far have a bullish opinion. On the strength of that overwhelming support, the California-based aerospace and energy contractor has kept a perfect rating for five months straight.

Last December, CAPS All-Star stocksracer shared some positive thoughts on Teledyne's positive momentum:

Excellent previous history of beating expectations quarter after quarter. These guys surely know how to create value for the stockholders. A definite buy on the long run. Also they perform in the strong sectors of aerospace and oil.

Teledyne is beating the market since that call. In fact, yesterday's surge came after the company topped Wall Street's forecasts yet again with a 36% jump in first-quarter income, and also issued upside guidance for fiscal 2008 -- consistent with stocksracer's take.

The bullish lesson?
Don't just assume that a company with consistent earnings growth is priced for perfection. Oftentimes, investors remain anchored to previous forecasts and fail to fully discount a company's true potential. Just as CAPS' stocksracer demonstrated, capitalizing on the "conservatism" of analysts is yet another way to trounce Wall Street.

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 fertilizer stocks Potash (NYSE: POT) and Mosaic 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?
Last December, for instance, XMFJordan pitched this prescient bear call on Ambac Financial:

From CDOs and SIVs to bonds, etc., Ambac has billions of dollars of risk on (and off) its books.

In the near future, once it starts taking the write downs it should be, Ambac is going to find itself needing to put up more capital as it is called upon to meet a "rating agency margin call."

This one -- along with MBIA -- is going to zero.

Don't let anyone tell you that this one is too big to fail.

Ambac is down a stunning 87% since that call. In fact, yesterday's 40% plunge came after the troubled bond insurer posted a whopping first-quarter loss of $1.66 billion, on continued charges related to subprime securities -- right in line with XMFJordan's prediction.

The bearish takeaway?
Never mistake large size for a large margin of safety. As the Bear Stearns debacle showed, a multibillion market cap is meaningless if much of that size is predicated on a risky, unsustainable, faulty business model. Instead, look to own a behemoth like Warren Buffett's Berkshire Hathaway that actually "rejects interesting opportunities" rather than taking on reckless amounts of risk.

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!