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 I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as low-rated Radian Group (NYSE:RDN): 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 members 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 930 members who've rated Motley Fool Rule Breakers pick American Science & Engineering have a bullish opinion of the stock. In September, one of those Fools, BadManNo1, explained why the maker of X-ray inspection systems was all cleared for takeoff: "This company produces cutting-edge counter-terrorism products, has the right connections, and is strategically aligned with the public's outcry for increasing security at our airports and other ports of entry."

Consistent with that call, shares of American Science surged yesterday after the company posted second-quarter profit growth of 63%, fueled by demand for its Z Backscatter Van detection system.

The bullish lesson?
Know when to break the rules. High-growth stocks are notoriously fraught with risk, but by buying into top-dog first movers with inroads into high-demand markets, you can reduce your downside substantially. As CAPS' BadManNo1 and our Rule Breakers team both understand, identifying financially healthy companies with genuine game-changing technology can be a reliable way to earn outsized gains.

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 plunge in highly rated Focus Media Holding (NASDAQ:FMCN) 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 by an average of 11.4%, annualized.

Did CAPS call the fall?

In late March, for instance, CAPS All-Star spiritof78 shared some bearish thoughts on Bidz.com:

I don't see online jewelry sales taking off rapidly or at all. Jewelry is such an individual thing and costly. How many people honestly buy their business suits online? ... some apparel/accessories can be sold online when sizes are small, medium, large. But high-end jewelry if I'm spending four figures I clearly want to see it, otherwise it cannot be properly valued.

Shares of the online jewelry retailer have fallen by more than 50% since that call. In fact, yesterday's drop came after the company reported a third-quarter earnings drop of 8% and slashed its holiday revenue outlook.

The bearish takeaway?
Trust your own eyes above all else. Just as it might pay to buy what you know (and enjoy), it's probably a good idea to stay away from stocks whose services you just can't see yourself using. Due diligence is always required, but if you're not impressed as a consumer, it might be a stretch to think you'll be impressed as an 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!