Tuesday's Biggest Stock Stars

Hey there, Fools! I've summoned our Motley Fool CAPS community once again to highlight Tuesday's biggest gainers among stocks with a top rating of five stars:

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

Our community of more than 83,000 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 the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, out of the 155 CAPS All-Stars who've rated Western Refining so far, only six have a bearish opinion. Fueled by that Foolish support, the Texas-based crude oil refiner recently regained a perfect five-star rating.

This outperform pitch -- pulled from leohaas' CAPS blog just more than a month ago -- offered our community an entirely "refined" forecast:

So why do I pick half a dozen refiners to outperform? Well, as explained here, demand and therefore margins will go up again in the near future. Not long thereafter refiner stocks will catch up with fundamentals... Last year margins started improving in January. This year they are still falling in January, so we may have to wait until the start of Daylight Saving Time (early March) before the fundamentals do improve.

Western Refining is already up 29% since that call. In fact, yesterday's pop came as oil prices climbed past $100, while Holly, yet another five-star refiner, reported better-than-expected fourth-quarter results on higher demand -- consistent with leohaas' outlook.

The bullish takeaway?
Know your business cycles. All companies have their ups and downs, but by knowing specific industries (and their key drivers) cold, you'll be in a better position to anticipate when those swings are likely to happen. After all, it's pretty tough to find a bargain-basement opportunity if you have no idea whether you've even reached the basement yet.

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are Tuesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's drop in highly rated telecoms AT&T (NYSE: T) and Verizon may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Back in February of 2007, for instance, CAPS All-Star TMFMattyA penned this compact competitive analysis on Dillard's:

Overpriced retailer operating in competitive industry against larger and more profitable players (Federated, Saks, etc.); sales growth anemic over last 5 years; considerable amount of debt; low ROE

Not surprisingly, shares of the department-store operator are down 54% since that call.

The bearish lesson?
Never underestimate the negative effects of tough (and big) competition. Without a distinct competitive edge, generating sustainable sales growth and strong returns on equity will likely prove to be an uphill battle. As TMFMattyA predicted, it was just a matter of time before Dillard's stock price properly reflected its highly leveraged, poor-returning business.

The final Foolish move
Investors often focus strictly on stock price movements (or the results), 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 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!