Tuesday's Biggest Stock Stars

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, like one-star mortgage insurers MBIA (NYSE:MBI) and Ambac Financial. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 1,270 members who've rated Vimpel-Communications have a bullish opinion of the stock. Last month, one of those members, gildwulf, shared a simple screen that the Russian telecom provider happened to pass:

* Market capitalization north of $10 billion
* Trailing P/E ratio between 8 and 14 times earnings
* Return on equity of at least 20%
* CAPS rating of four or five stars

With the help of yesterday's surge, Vimpel is up an impressive 31% since that call.

The bullish lesson?
Learn how to build your own screen machine. As long as your parameters are well-defined, rooted in logical reasoning, and, most importantly, proven to outperform, "mechanical investing" can be a powerful way to pick stocks. After all, even the great Benjamin Graham used his own special sauce of a screen to single out bargain-basement businesses.

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:   

While yesterday's drop in five-star stock Sun Hydraulics (NASDAQ:SNHY) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In mid-2007, for instance, CAPS member Tucson10 was already giving a bearish heads-up on Herbalife:

MLMs [multi-level marketers] have a life span. I think this one is in the downslope. How many MLMs can have the longevity of Amway? MLMs can be a good investment, but you have to be in them in the first 2 years to really make something. ... Unless they come up with something unique that consumers want, I'm thinking [Herbalife] has hit its shelf life.

Shares of the nutritional supplement distributor are down 50% since that call. In fact, yesterday's drop came after the company issued a disappointing 2009 outlook on a stronger dollar, while an analyst added that a slowdown in several key markets would also hurt -- consistent with Tucson10's warnings.

The bearish takeaway?
There's really no substitute for knowing a business model cold. As CAPS' Tucson10 demonstrates, when you understand exactly how a company makes money, you'll have a better chance of pinpointing where the business is in its natural growth cycle. Like Warren Buffett once said, "The investor of today does not profit from yesterday's growth."

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!