Tuesday's Biggest Winners and Losers

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Tuesday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, of the 548 CAPS All-Stars who've rated oil and gas contract driller Unit, an overwhelming 99% have a bullish opinion.

One year ago, my Foolish colleague Rich Smith (aka TMFDitty) helped bring the big Unit to our community's attention:

Not long ago, I argued in Stocks Madness that Philip Durell was right in calling Chesapeake "60% undervalued." The stock has performed admirably since. Today, Unit Corp reached a PEG of 0.4 -- 7.6 trailing P/E, and 19% projected earnings growth. While the firm's lack of free cash flow has me feeling nervous, I'm going to trust my instincts and rate this "60% undervalued-er" a buy.

Shares of Unit are up an impressive 32% since that call.

The bullish lesson?
Always seek a margin of safety. Stocks can be hazardous to your wealth, but by buying quality businesses at a fraction of what they're worth, you can dramatically lower risk while maximizing return. As Charlie Munger once said, "All intelligent investing is value investing -- to acquire more than you are paying for."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Tuesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS members, and for pretty good reason: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In February, for instance, CAPS All-Star TMFWBuffettJr used a lesson from the genuine Oracle to make a call on Lehman Brothers:

Warren Buffett warned that the problem with such a fantastic party like we had at Cinderella's mortgage ball over the last five years is that there are no clocks on the wall. He said the drinks taste a little better, the girls get a little prettier, and so you stay for just one more dance. But eventually midnight hits and everything turns back to pumpkins and mice. Lehman is caught holding a lot of pumpkins and mice, they're just trying to hide it a little while longer than everyone else.

Not surprisingly, shares of Lehman are down nearly 80% since that call. In fact, yesterday's drop came amid fresh worries that the investment bank could post significant mortgage-related writedowns for the third quarter -- consistent with TMFWBuffettJr's warnings.

The bearish takeaway?
Always try to spot a company's hazardous exposures before you get hurt by them. When things are going well, it's easy to become complacent as an investor, but that's precisely when you need to make sure management's ambitions aren't getting in the way of sustainable growth. As the real Warren Buffett also says, "You only find out who is swimming naked when the tide goes out."

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, tens of 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 into CAPS today and start participating. It's absolutely free and a lot of fun!