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 top ratings of four or five stars.

Without further ado:

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

Our community of more than 135,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98% of the 523 members who've rated Qiao Xing have a bullish opinion of the stock. In late April, one of those Fools, All-Star MagicDiligence, explained why the Chinese handset maker looked cheap enough to make the long call:

A true cigar butt valued at well under net cash, Qiao Xing Mobile is nevertheless a growing and quite profitable Chinese mobile phone maker. Can the company survive, or is the market correct in valuing the business at 0 against strong competitors?

After yesterday's market-bucking pop, shares of Qiao Xing are already up 21% since that call.

The bullish lesson?
In investing, it's far more important keep your head down than up. As long as you make a conscious effort to limit your downside, market-trouncing returns usually just take care of themselves. Like value superinvestor Seth Klarman once wrote, "Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk."

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

Here are five of Tuesday's biggest decliners with one- or two-star ratings:   

While yesterday's plunge in highly-rated Hansen Medical may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Last month, for instance, CAPS member jed71 warned our community of the dangers lurking within PMI:

This company is in a bunch of trouble. Large exposure to alt-A and [no documentation] loans in their portfolio. They do not have the cash to continue operations over the long term. Best case is buyout at fire sale prices -- but no one wants [mortgage insurance] exposure in this market.

After yesterday's double-digit dive, shares of the embattled mortgage insurer are already down 46% since that bear call.

The bearish takeaway?
Always identify a stock's risk exposures before they come back to haunt you. One of the most common mistakes we can make as investors is failing to see the dangerous things that lurk just around the corner. Unless you're willing to consider all of the possible ways your stock might get killed -- both in the short and the long run -- there's a good chance you'll wake up one day and get blindsided.

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!