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 the stocks with a top rating of five stars.

Without further ado:

There's a reason I selected the largest five-star gainers instead of other big-name winners making noise on Tuesday, like low-rated financials Lehman Brothers (NYSE: LEH) and UBS. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 94,000 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, of the 139 CAPS All-Stars who've rated Motley Fool Global Gains pick Melco PBL Entertainment, only eight have a bearish opinion. On the back of that strong support, the Hong Kong-based resort and casino operator received its first five-star rating last in February.

Before that, CAPS player truubeliever highlighted the stock in January as a smart bet with favorable, house-like odds:  

All negatives appear to be priced into the stock. Market for Macau casino stocks looking quite sour recently, but given the expectation of MAJOR revenues and profits from VIP operations at the Crown Macau, I expect MPEL to recover nicely. If you have the patience and tenacity to wait 3-4 years, the unquestionable success of the Crown and the City of Dreams will bring this stock to the $20++ range. Bottom feeders unite. This is the time to buy MPEL.

Melco PBL has recovered about 18% since that call.

The bullish takeaway?
Always be on the hunt for stocks priced for imperfection. It's virtually impossible to call "bottom" on a stock, but if you're confident that the risks are already baked into the price, there's a good chance your investment will turn out well. As legendary value investor Sir John Templeton famously said, "The time of maximum pessimism is the best time to buy."

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 although yesterday's drop in highly rated gold stocks Yamana Gold (NYSE: AUY) and Kinross Gold 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?
One year ago, for instance, CAPS player NetscribeBiotech offered some bearish thoughts on Trubion Pharmaceuticals' stock price:   

The company's valuation seems to be extremely rich. ... it'll take at least few years for the company to generate revenues from its products. At current levels the market seems to have discounted all the good news. However it seems that the risks pertaining to clinical trails are not adequately reflected in the price.

Not surprisingly, shares of the Seattle biotech are down roughly 60% since that call.

The bearish lesson?
Always make an effort to quantify a stock's upside and downside. If all of a company's potential is being discounted by investors, you'll have little room to profit (and lots of room to fall) no matter how well the business performs. After all, Templeton also said, "The time of maximum optimism is the best time to sell."

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

Over at Motley Fool CAPS, 94,000 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!