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:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like lower-rated retailers Lowe's Companies (NYSE: LOW) and Circuit City Stores. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 82,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, of the 476 CAPS players who have rated PetMed Express so far, a whopping 97% of them are bullish. On the strength of that Foolish support, the Florida-based pet-medication delivery company has kept a perfect five-star rating for more than six months straight -- impressive for such a small company.  

This outperform pitch by top-rated player luvb2b late last July touched on PetMed's recession-proof qualities:

The balance sheet is nice and the last earnings report was excellent ...

I also prefer the pet sector to other retail because I believe it is less economically sensitive ... especially pet health care. In a slower economy people may go out to eat less, or buy fewer new clothes, but let Fido suffer with easily treatable health ailments? Never.

Consistent with luvb2b's comments, shares of PetMed Express surged yesterday after management reported 60% growth in third-quarter earnings, despite all the economic turmoil.

The bullish takeaway? The sky isn't falling for all stocks. Regardless of how shaky the U.S. economy might look right now, you can always find pockets of opportunities that aren't too exposed to larger macroeconomic risks. For Foolish investors willing to look in relatively unconventional places, sidestepping huge market downturns is certainly possible.

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 yesterday's drop in five-star stock China Netcom Group (NYSE: CN) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Corinthian Colleges bear call by CAPS player EducatorPlus in early December:

Some of these students do not have the skills to be in classes so that they become bad debt risk and also bad PR for the company ... The market is narrow minded in looking at only admissions, because if students do not graduate they do not get jobs and they do not pay bills.

Shares of the California-based for-profit education company -- whose subprime loans accounted for 75% of its private lending in 2007 -- have plunged a depressing 56% since that pitch. In fact, yesterday's massive fall came after the company cut its 2008 earnings forecast due to student lender Sallie Mae's (NYSE: SLM) decision to no longer make loans accessible to subprime borrowers -- in line with the risks that CAPS' EducatorPlus had warned about.

The bearish lesson? Far too often, individual investors take a company's rising stock price as a sign that the business model itself is sustainable. The truly great ones, on the other hand, are able to see "around the corner" and spot a company's flaws well before the market does. By doing your own homework and ignoring Mr. Market's opinion, you give yourself a better chance of coming to an objective, untainted, and therefore more realistic view of a company's risk/reward profile.

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, above all else, 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!