Tuesday's Biggest Stock Stars

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

Without further ado:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday -- such as retailers Barnes & Noble (NYSE:BKS) and Nordstrom (NYSE:JWN) -- is simple: Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Our community of more than 75,000 CAPS Fools considers its five-star stocks the most likely to outperform the market.  

Written in the (five) stars?
For example, Sasol, a provider of coal-to-liquid (CTL) and gas-to-liquid (GTL) alternative energy technologies based in South Africa, has maintained a five-star rating for more than six months. The stock is a recommendation of our Motley Fool Global Gains service -- up 59% since it was singled out last December -- so that whopping support is easy to understand.

This bull pitch -- by CAPS player and Rule Breakers team member TMFBreakerThiel back in October 2006 -- gives us some insight into our Foolish community's thinking:

Sasol has perfected coal liquefaction and natural gas-to-fuel conversion. We have abundant natural gas and coal (particularly coal, in this country), and these technologies could be important role players in [the] future energy economy. Sasol has solid financials, pays a good dividend, and has had strong growth.

Sasol has returned 67% since that call. In fact, yesterday's pop was likely sparked by a bullish story in Barron's, which cited high oil prices, huge profitability, and increased global demand as reasons why the stock should keep rising. You know, just like TMFBreakerThiel, along with the rest of our community, has been saying for quite some time.

The bullish takeaway? Investing in alternative energy sources -- as a play on rising oil prices -- can be a wise decision. Of course, just like any other investment, it's crucial not to gamble on pie-in-the-sky technology. When Sasol was singled out by our Global Gains team, its CTL and GTL technologies had already produced nearly all of South Africa's diesel fuel and were enormously profitable, so it was far from a speculative "ethanol-like" long shot.

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

Here are Tuesday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So while Tuesday's drop in three-star stock Ericsson Telephone (NASDAQ:ERIC) may have caught some Fools off guard, one-star stocks are fully expected to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this bear pitch on government-sponsored lending cousins Freddie Mac and Fannie Mae -- by CAPS All-Star jwfoster -- in response to Tuesday's drop:

The destruction here comes as no surprise. Neither Freddie or Fanron could produce financials for five years during the strongest housing market in history. You knew once the volumes slowed and the collateral turned bad they were done.

The equity may become worthless while the government bails out the debt. Time will tell how this all plays out.

Of course, yesterday's sector-wide sell-off came after Freddie Mac reported a wider-than-expected loss of $2 billion, and also warned that it might have to cut its dividend in half next quarter.

The bearish lesson? When researching a stock, financial transparency should be a Fool's first priority. Government-sponsored enterprise or not, companies that lack updated financial statements, use complicated and extensive derivative strategies, and that have a suffering reputation are about as murky as they come. As Freddie Mac taught us yesterday, that shady combination can quickly lead to some awful surprises.

The final Foolish move
Investors often focus strictly on stock price movements (or the results)  without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, thousands of investors are Foolishly sharing insightful tips to help 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!