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:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Tuesday, like low-rated UBS (NYSE: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 150,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 96% of the 329 All-Star members who've rated Terra Industries have a bullish opinion of the stock. Last month, one of those top Fools, Somewhere, explained why the takeover target looked too cheap to pass up:

Last November, CF Industries got three board members they nominated elected. They waited for their nominations to get on board, then sweetened their buyout offer another four or five bucks a share. Then the board unanimously rejected the offer saying it was too low. ... That's gotta be embarrassing for CF, but it makes me think -- maybe that's because the offer really is much too low.

Consistent with that call, shares of Terra surged yesterday after finally agreeing to be acquired by Norwegian chemical giant Yara International for $4.1 billion.

The bullish lesson?
Learn to think like a business owner, not a stock trader. All sorts of noise can suppress a stock's price in the short term, but true investors focus on the factors that really count over time. As CAPS' Somewhere demonstrates, by focusing on attractive assets at bargain prices, you give yourself plenty of "upside" opportunities -- including getting bought by one of the big boys -- to earn an outsized return.

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 drop in highly rated Dynegy may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In late 2008, for instance, CAPS member Josux highlighted the headwinds working against Broadwind:

There are simply too many really good companies in and getting in the market that can outperform Broadwind when going toe to toe for their 'global' supply chain to make sense. Their only hope is a rewrack of management particularly at the company level and some serious cost cutting. This is a classic case being good in theory but not so good in application.

Including yesterday's market-bucking loss, shares of the wind industry products supplier are down 47% since that bearish call.

The bearish takeaway?
Never underestimate the protection that a competitive advantage provides. Having a powerful moat is what ultimately drives superior returns on capital, so unless you can clearly identify how a given company has an edge on its rivals, it's probably best to stay away. As Warren Buffett reminds us, "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, 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 retire wealthy.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!