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 one-star homebuilder Standard Pacific (NYSE: SPF). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 83,000 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?
Network monitor NetScout Systems, for example, has maintained a perfect five-star rating for the vast majority of the last four months. Last September, my fellow Fool Tom Taulli even highlighted the company's acquisition of rival Network General as a deal with several strong points. 

This bull pitch, by CAPS player evillate last December, displayed some impressive Foolish rhyme and reason:

They bought their biggest competitor.
That is always the best thing to do.
Now they make money together
as we all who buy the shares do too!

In line with our community's view, shares of NetScout surged yesterday after the company topped Wall Street's third-quarter profit expectations. Of course, management cited the marketplace's positive endorsement of the merger as the primary reason for the strong results -- just as evillate's poem had foreshadowed.

The bullish takeaway? Acquisitions don't always make sense, but when they do, the results can be outstanding. Some of the good reasons for a merger include economies of scale, use of complementary resources, and the elimination of operating inefficiencies. So if you ever find a deal with all of the above -- just as the NetScout/Network General merger seems to be showing (so far, at least) -- there's plenty of reason to get bullish.  

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 highly rated tech stocks SiRF Technology (Nasdaq: SIRF) and Garmin 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?
Back in late April, for instance, CAPS All-Star mkdcardinal penned this beautiful piece of IndyMac bear logic:

Quarterly loan volume is up 27% over last year at this time, but the quality of the loans has decreased. Hm... The increased volume is desperation -- a Ponzi-esque attempt to keep money coming in to cover pre-existing debts. It's already fallen a long way, so this might be a bad time to short -- but there seems to be a long way yet before bottom.

The Californian lender was already down 32% over the previous year when that call was made, but has managed to plunge another 70% since.

The bearish lesson? Just because a stock has plunged in price doesn't necessarily make it cheap. Trying to catch a falling knife can be profitable, but only if you can conclude that the stock is trading below intrinsic value. Unless you're sure that a company can survive even the worst of financial storms, investing in overleveraged balance sheets -- with countless layers of unknown risk exposures -- simply isn't a Foolish idea.   

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!