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, like airline stocks Continental Airlines (NYSE: CAL) and Northwest Airlines. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 81,000 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, a whopping 98% of the 302 CAPS players who've rated LSB Industries are bullish. Backed by that Foolish support, the Oklahoma-based maker of heat pumps, and air handling and chemical products has consistently kept a top rating for the past several months.   

This bull pitch -- by CAPS player RockChalkChicago back in December 2006 -- was one of the first to bring LSB's rather eclectic business mix to our community's attention:

This is a strong yet undercovered company. It has good management and good fundamentals. There are two main units at LSB Industries.

1. The Chemical Unit-this is largely a stable value segment of the company and investors should NOT look for much growth or profits...

2. The Climate Segment-this is the segment with the higher margins and profits. There is great demand for the products that LSB is putting out there that they unfortunately have a back order. This segment is innovative and will most likely be the mover of this stock price.

LSB Industries is up a massive 122% since that call.  

The bullish takeaway? There's no substitute for knowing a business model cold. The only way to reasonably predict a company's fortunes is to understand how each of its parts interact with various industry and economic variables. As Warren Buffett once wrote, "Equity Investment Strategy = Evaluate the Business in Its Entirety."  

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 while yesterday's drop in four-star stock New Oriental Education (NYSE: EDU) 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?
Take, for instance, this Blockbuster/Netflix (Nasdaq: NFLX) bear call -- by CAPS player Gumfactor -- just three months ago:

Personally, I think that both Blockbuster and Netflix are both going to go the way of the dodo without some serious revamping of their business models. ...

Already cable offerings including pay-per-view and on-demand have reduced the need for Blockbuster.

[And on Netflix:] In the age of the Internet, pay-per-view, video-on-demand, and now online tv stations, somebody thought that mail order movies was going to be hot. In the 1970s I think this may have gotten me excited. But today?

Seemingly on cue, shares of both Blockbuster and Netflix dropped yesterday after Apple (Nasdaq: AAPL) announced a new movie rental service at its iTunes store, strengthening many investors' belief that digital downloads will eventually become the dominant delivery vehicle for movies -- consistent with Gumfactor's take.

The bearish lesson? Always insist on a wide moat. If you're truly convinced that a specific business model is outdated -- and can envision better-equipped entrants eating its lunch -- it's probably best to take a pass. Though Apple's foray into the movie rental business doesn't necessarily mean Blockbuster -- and especially Motley Fool Stock Advisor pick Netflix -- won't be able to compete effectively on the digital delivery front, it should at least cause some pause.

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!