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 105,000 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 59 CAPS All-Stars who've rated IXYS, only one has a bearish opinion. On the strength of that Foolish support, the small-cap semiconductor company has kept a four- or five-star rating for more than six months straight.

Last year, CAPS player investu let Fools in on IXYS' many bullish qualities:

Small Cap with high insider ownership, little debt, and cash flow positive. Competes as a small sapling in a forest, with competive gross margins, high book value, and low P/E. Alternative energy should do well with any jolts to energy sector. Nice, unnoticed, potential gem for patient investors

IXYS is beating the market since that call. In fact, shares of IXYS surged for the second straight trading session yesterday, after the company said last Friday that its fourth-quarter profit more than quadrupled -- right in line with investu's take.

The bullish lesson?
Dynamite returns come in small packages. As CAPS' investu understands, singling out attractive small caps with attractive margins, strong insider ownership, and low price-multiples is a great low-risk way to beat the market. While most billion-dollar big-caps have their best days behind them, small-cap value stocks have the most room to run.

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 five-star stock Sigma Designs (NASDAQ:SIGM) 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?
Last month, for instance, CAPS All-Star SwissFirm fittingly shared some thoughts on another Swiss firm, UBS:

i expect this stock to go back down to $25 after its recent run-up...in fact i dont think people remember the 19 BILLION dollars in writedowns that just occurred. The market cheered this stock for reasons beyond my comprehension but its going back down.

Just as SwissFirm had figured, shares of UBS plunged yesterday after the bank launched a $15.5 billion rights issue in another attempt to cover mounting mortgage-related writedowns.

The bearish takeaway?
Don't get distracted by the deadly Dead Cat Bounce. As long as you continue to remain bearish on a company's underlying fundamentals, it's best to stick to your long-term thesis and not become infected by day-to-day swings of sentiment. As CAPS' SwissFirm shows, being able to stay focused on a company's true economic picture, while Wall Street seems to be strangely forgetting about it, can save your portfolio a ton of losses.  

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!