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 stocks IndyMac Bancorp (NYSE: IMB) and Krispy Kreme Doughnuts. 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?
For example, out of the 725 CAPS players who've rated Syneron Medical, a whopping 97% are bullish. Last week, my Foolish colleague Kristin Graham highlighted the Israeli maker of medical aesthetic devices as one of 2008's best international stocks.

This outperform call, by CAPS player MJKpayday last December, offers some insight into our community's thought process:

A cheap company that got a real good hair cut because margins decreased and we're all worried about a recession, despite consistently growing revenues for years and guidance for increased sales in 08' ... their partnership with [Procter & Gamble (NYSE: PG)] to make non invasive devices for home use could be huge!

Consistent with MJKpayday's pitch, shares of Syneron surged yesterday after management reported record revenues of $38.1 million for the fourth quarter, trouncing Wall Street's expectations in the process.  

The bullish takeaway?
Always think like a business owner. All sorts of psychological and economic factors can depress a company's stock price in the short term, but the key to success is focusing on the factors that really count over time. By buying a market leader with mouth-watering profitability, a rock-solid balance sheet, and a massive market opportunity at a discounted price, you give yourself plenty of chance to profit no matter what the economy does.  

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 Suntech Power Holdings (NYSE: STP) 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?
Just last week, for instance, our very own Bill Mann (a.k.a. TMFOtter) chimed in on the bailout buzz surrounding the embattled MBIA:

If the rumors are true and the monoline insurer bailout focuses on muni bonds, this equity is toast. One of my bigger regrets is covering my real live MBIA short a little too early this past year. Tough to get those shares now.

Almost exactly as the rumors whispered, shares of MBIA and Ambac tumbled yesterday after billionaire Warren Buffett said that he had indeed offered to reinsure municipal bonds guaranteed by the companies. The two bond insurers declined as investors realized that Buffett's deal would leave them with fewer solid assets to counter risk from their problematic ones -- just as TMFOtter had figured all along.

The bearish lesson?
Identify a stock's negative catalysts before the majority of investors realize it. Not all short rumors you find will have solid bases, but at the very least, you should consider their possibility and what kind of impact they'll have if found to be true. After all, with investing, it's just as important to focus on what can go wrong as what can go right.

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!