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 I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as one-star retailer RadioShack (NYSE: RSH): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 84,000 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 the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, out of the 1,128 CAPS players who've rated two-time Motley Fool Hidden Gems selection OYO Geospace, a whopping 99% are bullish. Fueled by that Foolish support, the small-cap provider of seismic data equipment has maintained a perfect five-star rating for more than six months straight.

This outperform pitch, from our own Hidden Gems analyst TMFPlatoish back in 2006, gleans some insight into our community's bullish logic:  

The intriguing aspect of OYOG's business is what they call reservoir characterization systems. These consist of an array of stationary sensors on the bottom of the ocean that periodically send data to the drilling rigs, so they can monitor reservoir depletion and direct oil recovery operations. ... This is a growing and a high margin business and is why I'm interested in this company.

With the help of yesterday's double-digit pop, OYO Geospace is beating the market since that call.

The bullish takeaway?
The greatest stocks are the ones Wall Street misses. Specifically, professional analysts tend to overlook small-cap companies on the cusp of huge secular shifts, because they prefer to focus their attention on the "status quo" instead. As long as you're willing to dissect relatively unknown business models -- as TMFPlatoish clearly did with OYO Geospace -- the small-cap space is a proven multibagger breeding ground.

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 Ceradyne (Nasdaq: CRDN) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Last April, for instance, CAPS All-Star Allstar13913 filled out this bearish checklist on Uranium Energy:  

Unfollowed Stock? Check.
Overvalued? Check.
Stocklemon hates you? Check.
Run by a bunch of Stock Promoters who have run several other companies into the ground? Check.
No real value model because you have no proven uranium reserves? Check.
Pure Hype and Speculation leading to a way too high share price? Check.

Short! And reap the profits.

Not surprisingly, the stock of this Texas-based junior resource company has fallen 56% since that call.

The bearish lesson?
Unless the numbers back it up, don't believe the hype. A few "great" stock stories have some substance (and actual revenue), but at the very least, you need to consider whether management -- along with its business model -- deserves any credit. With all of the established, reputable, cash-flow-generating companies to choose from, speculating on questionable enterprises with overly promotional management teams doesn't seem worth it.

The final Foolish move
Investors often focus strictly on stock-price movements (or the results), 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 become a more Foolish investor.

Log in to CAPS today, and start participating. It's absolutely free -- and a lot of fun!