Tuesday's Biggest Stock Stars

We at the Fool usually don't pay attention to day-to-day price gyrations. But some moves are just so big that investors should at least take notice -- especially when we could have seen them coming.  

The big winners
With that in mind, I've summoned our Motley Fool CAPS community to highlight Tuesday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday -- such as Research In Motion (NASDAQ:RIMM) and Apple -- is simple. Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Our community of more than 70,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, our odds of finding the next big winner surely will improve.  

Did CAPS predict the pop?
For example, with 80 total CAPS ratings, Zoran has a relatively small following in our community. But a whopping six out of seven Wall Street firms -- whose picks we track on CAPS -- have given the consumer electronics chipmaker an outperform rating.

This outperform pitch -- pulled from Zoran's CAPS page -- gives us a glimpse into our community's thought process:  

Sector pick -- develops integrated circuits and related products for DVD players, movie and home theater systems, digital cameras and video editing systems. Not as profitable as I would like, but strong cash flows and good cash position/balance sheet. Share price has historically been quite volatile.

Since CAPS All-Star PearlandTX made that call last December, Zoran is up 65%. In fact, yesterday's 15% pop came after the company more than tripled its Q3 earnings, trouncing analyst expectations in the process.

The bullish takeaway? Though we certainly don't recommend a "top-down" approach, homing in on companies that stand to benefit from rampant consumer cravings -- like our voracious appetite for electronic gadgetry -- can prove quite rewarding. And if the company you've spotted produces strong free cash flow and has a solid financial position to boot, you've got the real makings of a winner on your hands.

Now for the losers
Of course, winning isn't everything in the stock market. Stocks go down, too.  

Here are yesterday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's huge losses in Level 3 Communications (NASDAQ:LVLT) and Coach may have caught shareholders off-guard, our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this Lexmark International pitch by bershats one year ago:

Lexmark makes printers that compete with Aggressive, successful companies Like Hewlett-Packard (NYSE:HPQ), Samsung, and Canon in the home and Small office. They are showing declining revenue because they are losing market share, and are focused on the less-lucrative black and white market. EPS is only increasing because A) Margins are increasing because with fewer printers sold, revenue skews more toward high margin ink, and B) Management keeps buying back shares.

Neither of these are sustainable trends.

The producer of laser and inkjet printers is down 34% since that call. Yesterday's 7% drop, as a matter of fact, was caused by a whole slew of bad news: a sharp decline in Q3 earnings, management's gloomy Q4 outlook, and, finally, its decision to cut more than 1,650 jobs (or nearly 12% of its workforce). Ouch.    

The bearish lesson? Never underestimate the ravages of competition. As surely as night follows day, success attracts competitors looking to replicate and even improve on the (proven) winning model. The secret to sustainable long-term returns, then, is to invest in companies with sustainable long-term advantages.

As Warren Buffett says, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."  

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. It's absolutely free -- and a lot of fun!