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 Sony (NYSE: SNE) and DryShips (DRYS) -- is simple: Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Written in the (five) stars?
Our community of more than 75,000 CAPS Fools considers its five-star stocks the most likely to outperform the market.  

For example, California-based video game publisher Activision has had more than 346 CAPS All-Stars give it an outperform rating, while just seven are bearish. Of course, the stock is a two-time Motley Fool Stock Advisor selection -- delivering whopping returns of more than 200% on both occasions -- so the Foolish fanfare is easy to understand. 

This bull pitch -- by icetigaurus back in March -- reflects much of the bullish sentiment found on Activision's CAPS page:

Activision looks good this year with their support of the Nintendo Wii (including online games for it) and their popular Guitar Hero, Call of Duty, and Tony Hawk games. We are at the start of the next-gen console cycle, and ATVI looks to profit greatly from it.

The stock is up a solid 29% since that pitch was written and has returned 31% over the past year. In fact, yesterday's pop came after management upped its third-quarter and full-year guidance, attributing the decision to robust sales of blockbuster games Guitar Hero III and Call of Duty 4. You know, just like icetigaurus had forecast all along.   

The bullish takeaway? Always know what stage of the product cycle your company currently sits in. Wall Street's myopic thinking often causes it to beat down seemingly sluggish businesses, without realizing that imminent new technology -- and the products that go along with it -- should serve as powerful catalysts for future growth. By buying into companies on the cusp of blockbuster product rollouts -- especially when Mr. Market seems oblivious to it -- you put yourself in a prime position to outperform.

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 five-star stock Canadian Natural Resources (NYSE: CNQ) may have caught our community off guard, one-star stocks are fully expected to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this WCI Communities bear pitch by CAPS All-Star enelson87 just over one week ago:

Between the Miami condos, shady accounting, poor capitalization, cash burn, and covenant violations, [I] dont see how these guys can possibly survive this market. Unless Icahn or someone like him saves it, this company should cease to exist in pretty short order.

The Florida-based homebuilder is already down 35% since that call and has fallen a gut-wrenching 84% over the past year.  

The bearish lesson? Just because a stock has already gone down in price, that doesn't mean it's due for a comeback. Trying to catch a falling knife can be a profitable venture, but only if you can reasonably conclude that the stock is trading below intrinsic value. If a company's industry outlook, its financial picture, and the character of its management are so cloudy that it's virtually impossible to conduct a sensible valuation, then you're probably better off just moving on.

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 investment 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!