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 low-rated telecom stocks Motorola (NYSE: MOT) and Sprint Nextel. Stocks go up all the time, but unless you are able to predict the pop, what does it matter?

Our community of more than 100,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 113 CAPS All-Stars who've rated Flowserve, only three have bearish opinions. On the strength of that top-notch support, the Texas-based provider of flow control systems has kept a four- or five-star rating for more than six months straight.

One year ago, CAPS All-Star TheStillMan helped our community stay in the flow.

Flowserve will benefit enormously from two separate factors, namely the critical need to upgrade and expand existing refineries and the long term global water capacity requirements. It has manufacturing capability and skills that are second to none within its broad niche.

Flowserve is up an amazing 145% since that call. In fact, yesterday's surge came after the company said its first-quarter profit more than doubled, fueled by strong sales in the oil and gas, as well as power, markets -- consistent with TheStillMan's outperform pitch.

The bullish lesson?
Let the megatrends be your friend. While we wouldn't take a purely "top-down" approach to picking stocks, identifying select companies that stand to benefit from major long-term business trends is a proven way to outperform. And as CAPS' TheStillMan understands, buying into a stock that plays on several important themes is a pretty clever way to diversify, as well.

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 drop in highly rated Merck (NYSE: MRK) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In its first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Last year, for instance, CAPS All-Star pencils2 shared some of Dune Energy's numbers with our community:

In the most recent quarter, the profit margin was -1354.87%. In 2006 it was -707.60%. Uh, not seeing any improvement there. ... They keep issuing debt and the business is incredibly inconsistent producing cash flow. ... Dune has been increasing revenue, which translates into them losing more money. When you have horrific margins and increasing sales, you are not going to do well.

Not surprisingly, shares of the Texas-based oil and gas producer are down 40% since that call.

The bearish takeaway?
Not all growth is created equal. Investors often get too excited about a company's sales increases and profit potential without considering how much capital is required to generate that growth. As Warren Buffett wrote, "Growth benefits investors only when the business in point can invest at incremental returns that are enticing. ... In the case of a low-return business requiring incremental funds, growth hurts the investor."

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!