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 stocks with a top rating of five stars.

Without further ado:

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as low-rated NutriSystem (NASDAQ:NTRI): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 95,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 111 CAPS All-Stars who've rated Layne Christensen, only a single one has a bearish opinion. On the back of that top-notch support, the Kansas-based provider of drilling and construction services has kept a perfect rating for nearly five months straight.

Back in June 2007, CAPS player marinepride showed us the beauty of Layne's diversified business model:

Supply and demand and all under one roof -- Oil, Minerals, Water. Automatic money making businesses in the past and even more so in the future. Oil prices are high but how much do you pay for a gallon gas [versus] a gallon of water??? Even if one portion of business falls off, the other businesses keep it going -- thirsty yet?!?

Layne Christensen is beating the market since that call. In fact, yesterday's huge pop came after the company posted fourth-quarter profit growth of 44%, led this time around by surging sales in its mineral exploration segment -- consistent with marinepride's outperform pitch.

The bullish takeaway?
Always be on the hunt for businesses that diversify intelligently. As long as a company doesn't engage in the dreaded diworsification and stays within its area of expertise, selling across several different markets can be an effective way to mitigate risk. As Layne Christensen's portfolio consistently shows, strength in one segment typically makes up for not-so-strong results in the others.

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 although yesterday's massive plunge in highly rated First Marblehead (NYSE:FMD) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
In March 2007, for instance, CAPS All-Star NetscribeTelecom shared some bearish thoughts on Globalstar:  

The company's operational leverage is also on the higher side. Hence any downswing in its average revenue per user could accentuate its operational risk and can hurt its bottom-line significantly. The company is unlikely to generate free cash flows for next few years as it requires more than $1 billion for its capital expenditure.

Not surprisingly, shares of the California-based satellite communications company have fallen 50% since that call.  

The bearish lesson?
You should seriously consider modeling ... financial modeling, that is. Discounted in a stock's price are specific revenue-growth, margin, and capital-spending assumptions, so being able to model those factors under various scenarios -- whether on a spreadsheet or piece of paper -- can give you a better idea of what the stock is really worth. Consciously thinking through these kinds of issues might seem tedious, but as NetscribeTelecom demonstrated, it prevents portfolio pain in the long run.

The final Foolish move
Investors often focus strictly on stock price movements 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!