Tuesday's Biggest Stock Stars

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

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday, like low-rated Advanced Micro Devices (NYSE:AMD). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 115,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, 94% of the 158 CAPS All-Stars who've rated China Medical Technologies have a positive opinion of the stock.

In June, CAPS member faboo28 helped bring the medical device company's sliding stock price to our community's attention:

[China Medical's] profit margins, return on assets and return on equity are all robust. The company carries a manageable amount of debt, and it also announced a dividend increase. ... If anything, I think the market is underestimating [China Medical's] prospects, driving its stock downward because of macroeconomic factors that have little to do with the company itself.

That was just part of faboo28's thorough pitch on the company, check out the entire pitch on CAPS.

Consistent with that call, shares of China Medical popped yesterday after the Beijing-based company said it would buy a human papillomavirus (HPV) detection system from Molecular Diagnostic Technologies for $345 million. HPV causes cervical cancer and other sexually transmitted diseases.

The bullish lesson?
Never confuse a stock's performance with the real performance of the underlying business. As CAPS' faboo28 understands, dominant, financially healthy companies like China Med are often positioned to take advantage of downturns by acquiring attractive assets at good prices. If a company's numbers remain healthy, its future prospects remain bright, and its competitive position remains strong, a sliding stock price is simply an opportunity to own more.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Tuesday's biggest one-star decliners:   

While yesterday's plunge in five-star energy stocks Chesapeake Energy (NYSE:CHK) and Petrobras may have caught our community off guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS All-Star uclaoda87 shared this bearish outlook on UAL:

When fuel prices go back up and businesses look to cut costs, business travel will be curtailed. This leaves vacation travel, which may also be economized due to multiple factors such as unemployment, increased cost of living and uncertainty about the future. Fewer flights with higher costs and demand destruction will lead to less revenue. Unions will only make this worse, so airline failures and consolidation I believe are inevitable.

Shares of the airline operator are down 57% since that call. In fact, yesterday's plunge came on rising oil prices and worries that travel spending would continue to decline -- exactly as uclaoda87 had warned.   

The bearish takeaway?
Protect your portfolio from airline sickness. Unless you have the utmost confidence that a specific airline can indeed sustain superior returns on capital -- be it through differentiation or a low-cost structure -- the cutthroat nature of the business makes it difficult to make a decent long-term buck. In Warren Buffett's words, "You've got huge fixed costs, you've got strong labor unions, and you've got commodity pricing. That is not a great recipe for success."

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! 

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.