In early October we are flying in from Australia and picking up a rental car at LAX and driving the short distance to Hermosa Beach. We will stay there overnight and then drive down to San Diego the next day.

I would really appreciate recommendations on what we should stop and see on the trip, keeping in mind that we will be trying to follow the coast as close as possible.

We have the whole day set aside so would like to see as much of that area of California as possible in that short timeframe.

I would make stops in Huntington Beach, Laguna Beach, and La Jolla. Solana Beach is also nice for strolling.

I would recommend a stop in San Juan Capistrano and dining at Ramos House, a very casual outdoor small restaurant with fabulous food right next to the train station and rail tracks. A stroll down the Main Street and visit to the Mission is nice as well.

You'll probably get too many suggestions than you can do in one day. Driving along the coast will be slow going.

All of the towns already mentioned are interesting, but personally I would skip Huntington Beach (similar to Hermosa) and definitely stop at San Juan Capistrano.

http://www.sanjuancapistrano.net/

You could also take in Mission San Luis Rey in Oceanside. It's about four miles from Interstate 5. Once you get to San Diego, you can visit the first Mission, San Diego de Alcala in Mission Valley.

http://www.sanluisrey.org/

Newport Beach, with Balboa and Lido Islands are fun to visit. There is a little ferry boat you can take.

I would definitely take the little ferry to Balboa Island, it's just fun, and totally old-fashioned Southern California "beachy". The walk along the path in front of the waterfront homes is really nice (nice to ogle the homes).

For just beach, with nice shopping and eating, we like Manhattan Beach, but if you're going to Hermosa, probably not much different.

I recommend making more of a day of it in Hermosa Beach.

Leave in the afternoon and stop in Laguna Beach for dinner.

I like your idea of driving through the day, stopping here and there. It's a nice drive, and riding along the coast during daylight will make it more rewarding. If you want to stop at either San Juan Capistrano or Laguna, then it will be most efficient for your route to choose one or the other. Personally, I'd choose Laguna as the more picturesque stop.