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 top ratings of four or five stars:
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Company
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Yesterday's Gain
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Melco Crown Entertainment (Nasdaq: MPEL )
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15.64%
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Allied Irish Banks
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10.68%
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Precision Drilling Trust (NYSE: PDS )
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10.29%
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PotashCorp (NYSE: POT )
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5.52%
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Kraft Foods (NYSE: KFT )
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4.89%
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There's a reason I selected those notable gainers, as opposed to other winners making noise on Tuesday, like low-rated Ford (NYSE: F ) . Stocks go up all the time, but unless you were able to predict the pop, what does it matter?
Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.
Written in the (five) stars?
For example, 97% of the 401 All-Star members who've rated Melco Crown have a bullish opinion of the stock. Last year, one of those top Fools, fuzion23, explained why the Macau casino operator was a bet with favorable odds:
First, China population is a lot larger than the U.S. Secondly, Chinese people love gambling and China has about 2 trillion dollars to pump back to the economy ... Finally, China restriction travel to Macau will eventually be lifted or loosen up if they realized the growth in Macau has decreased substantially.
Consistent with that call, shares of Melco Crown surged yesterday on a report that Macau gaming revenue jumped 48% in December.
The bullish lesson?
Learn to be long-term greedy when others are short-term fearful. Going against the herd is never easy, but if you truly believe in a company's long-run potential, major downturns can offer the very best buying opportunities. As Warren Buffett reminds us, "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
And now for the losers ...
Of course, winning isn't everything in the stock market.
Here are five of Tuesday's biggest decliners with one- or two-star ratings:
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Company
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Yesterday's Loss
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Hot Topic (Nasdaq: HOTT )
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7.37%
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NutriSystem
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6.11%
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Builders FirstSource
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4.77%
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Steak n Shake
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4.69%
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Limited Brands
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3.26%
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While yesterday's drop in highly rated Alcoa (NYSE: AA ) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.
Did CAPS call the fall?
Last spring, for instance, CAPS member TradingBandit warned that Hot Topic looked way too hot to handle: "High P/E plus inconsistent earnings history, selling dying fashion trends and overpriced compared to sector members. Recent rise is a short-squeeze and is worth around 5 bucks and is headed there soon."
Following yesterday's fall, shares of the specialty teen retailer are down more than 50% since that warning.
The bearish takeaway?
Never confuse an improving price with improving prospects. If a company's underlying fundamentals continue to deteriorate, short-term bouts of exuberance can last for only so long. As Buffett observes: "For some reason, people take their cues from price action rather than from values. ... The dumbest reason in the world to buy a stock is because it's going up."
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 identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you retire wealthy.
Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!
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