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 -- like solar stocks LDK Solar (NYSE: LDK) and Solarfun Power -- 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 76,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its predictive prowess: Over the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, out of the 101 CAPS All-Stars who've rated machine-tool maker Hardinge, only a single one is bearish. Hardinge's stock has been slashed in half over the past month, thanks to a third-quarter earnings miss, but the continued Foolish support amid the freefall might indicate a turnaround opportunity.    

This bull pitch -- by JFiorini in late November -- reflects much of the contrarian sentiment on Hardinge's CAPS page:

According to a partner of mine who spent 40 years in the manufacturing business, "You can't buy a better machine tool than a Hardinge." Combine this with the fact that the company, while they may have missed recent expectations, is still growing earnings at an excellent pace and it paints a great picture for them. ... All the qualitative factors are there -- not to mention that any growing company (with a 70 year operating history) that is trading at a discount to book value is okay in my book.

Hardinge is up a sweet 11% since that call just last week.

The bullish takeaway? Purchasing stocks below, or near, book value is one of the simplest ways to achieve downside protection. The value of a company's hard assets -- like cash, inventory, property, and equipment -- can theoretically act as a floor on its stock. But if the stock also has solid earnings growth behind it -- creating additional "upside" to boot -- that's a risk/reward proposition that needs to be considered.

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 Layne Christensen (Nasdaq: LAYN) may have caught some Fools off-guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Magna Entertainment underperform pitch -- by CAPS player racetracker -- early last June:

Unless they can unload more underperforming racetracks and land not needed for racing, I do not see this company becoming profitable.

They also have had too much turnover of key staff over the last few years. The chairman of the company has made many plans but executed poorly on most publicly disclosed plans. I would not recommend this stock until I see substantial improvement of their operations.

The Canadian owner and operator of horse-race tracks is down 65% since that call, and it's fallen 75% over the past year.  

The bearish lesson? Always follow up on management's promises. One of the easiest ways to assess the quality of a company's leadership is to go back several years and see whether those leaders have actually delivered on their stated objectives. Management teams are forever forward-looking, but without a proven track record of success, even the simplest plans should be taken with skepticism.

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!