Tuesday's Hottest Stocks

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 one-star stock Origin Agritech (Nasdaq: SEED). 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 1,562 members who've rated Hercules Offshore have a bullish opinion of the stock. About a year ago, one of those Fools, MaherDaddy, explained why the stock had a herculean upside:

With an 80% stock drop over the year with energy stocks hammered, now is the time to buy this on the cheap! Lets face it ... no matter what the president does we will still need to drill for oil ... there will be a balance between using oil and finding new green resources. At 52 week low right now ... sweep in for a buy!

Shares of the oil driller are up more than 72% since that call. In fact, yesterday's nearly 17% pop came after its quarterly loss narrowed significantly on increased drilling activity and higher energy prices -- consistent with MaherDaddy's bull case.

The bullish lesson?
Learn to be long-term greedy when others are short-term fearful. Going against the herd is never easy, but if you truly believe in a company's long-run demand story, major downturns can offer the very best buying opportunities. As Warren Buffett reminds us, "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

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 Arena Resources may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Less than three months ago, for instance, dantheinvestor warned that NutriSystem's increasing retail presence would lead to an unhealthy situation:

Retail will add more [operating expense], less recurring revenue, and lower margins. [Wal-Mart Stores (NYSE: WMT)] may be OK, but they aren't hooking new customers into recurring shipments and auto billing, which will stifle [NutriSystem's] growth and earnings.

Shares of the weight-loss specialist are already down 45% since that call. In fact, yesterday's double-digit plunge came after the company issued a weak first-quarter outlook on a spike in marketing costs and disappointing results from recent partnerships -- exactly as CAPS' dantheinvestor had warned.

The bearish takeaway?
There's just no substitute for knowing a business model cold. Like dantheinvestor demonstrates, the only way to reasonably predict a company's fortunes is to know exactly what sort of strategies management is pursuing, and questioning if they can actually create value by doing so. As Buffett once wrote, "Equity Investment Strategy = Evaluate the Business in Its Entirety."

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!