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 Sprint Nextel (NYSE:S). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. So far, CAPS has indeed proved its market-beating prowess: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 2,267 CAPS members who've rated Motley Fool Rule Breakers recommendation Exelixis have a bullish opinion of the stock. Early last month, one of those Fools, apiperisdown, explained exactly what gave the biotech stock an inside edge:

Insider buying indicates that they are not that bummed that [GlaxoSmithKline (NYSE:GSK)] passed. CEO put a million dollar bet on his company right before Halloween. Trick? or Treat? I'm gonna take a shot and say treat. Giddy up.

With the help of yesterday's pop, Exelixis is beating the market since that call.

The bullish lesson?
Always keep an eye on the insiders. Managers and board members, after all, know their business better than anyone else. If you see them buying stock on the open market, it's one of the best indicators of a promising opportunity. Even though CEO George Scangos actually bought $80,000 worth of stock on Oct. 30, a 2.2% increase in his direct holdings, what Peter Lynch once said still holds true: "Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise."

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 drop in five-star stock Chesapeake Energy (NYSE:CHK) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In late August, for instance, CAPS member billal119 was already predicting that Zale would lose its luster: "Price rose extremely high today, up over 16%, but only due to forecasts of higher sales (based on higher sales report from the company). The market is doing horrible, and a luxury item like jewelry will not be able to create a profit in the short term."

Not surprisingly, shares of the jewelry retailer are down a depressing 82% since that call. In fact, just last week, Zale said its quarterly loss widened to $45.3 million, and withdrew its earnings guidance for the year -- consistent with billal119's warning.

The bearish takeaway?
Always trust your own eyes above all else. Very specific growth estimates -- especially ones that come from management themselves -- are discounted into a stock's price. One of your most important jobs as an investor is to determine whether or not those discounts are justified. As CAPS' billal119 understands, any company can pop on rosy guidance, but if those forecasts aren't rooted in economic reality, it's just a matter of time before the gains start to get grounded.

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!