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 low-rated Nortel Networks (NYSE:NT). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 125,000 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 it began in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 96% of the 176 All-Star members who've rated Motley Fool Income Investor pick Veolia Environnement have a bullish opinion of the stock. Last month, one of those Fools, freestate80, explained why we should consider the French water company:

Water treatment and waste services. Neither are highly glamorous but both are needed worldwide. This French based company focus in mature markets as well rapidly developing markets worldwide. It has contracts in Europe, Western and Eastern, Asia, and North America. A global leader which should be able to expand its business ...

Veolia is beating the market by 24 percentage points since that call.

The bullish lesson?
Boring dividend payers don't always mean sleepy returns. In fact, buying into financially strong, globally well-positioned, and most importantly, bargain-priced dividend stocks is one of the more reliable ways to trounce the market ... with a lot less risk. As CAPS' freestate80 understands, in today's manic environment, a little dividend stability can go a long way toward protecting your portfolio. 

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 massive drop in highly rated Satyam Computer (NYSE:SAY) may have caught our community off-guard, one-star stocks are 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 late April, for instance, CAPS All-Star shop1 warned of the West-Coast doldrums facing Brookfield Homes:

Brookfield builds a lot of homes in California. The data shows that California is one of the states that has been hit hard by foreclosures. ... It is unlikely the company has been able to expand sales and improve income in the California market. This company is an underperform until the housing market turns around in California, which doesn't seem to be anytime soon.

Shares of the luxury homebuilder are down 74% since that call.

The bearish takeaway?

Get out of dangerous neighborhoods while you can. Just as companies with very little product diversification should give Fools some pause, those that are overly exposed to just a few geographic regions should cause concern. When things are booming, geographic risk might seem trivial, but as Brookfield demonstrates, any material troubles in those areas could hurt investors.

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! 

On Jan. 12, 2009, Fool co-founder David Gardner, Jeff Fischer, and their Motley Fool Pro team will accept new subscribers to their real-money portfolio service. Motley Fool Pro is investing $1 million of the Fool's own money in long and short positions in a range of securities, including common stocks, put and call options, and exchange-traded funds (ETFs). They also incorporate proprietary CAPS "community intelligence" data into their research. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.