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 why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like low-rated lender Thornburg Mortgage (NYSE: TMA). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 93,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, all 50 CAPS All-Stars who've rated Wonder Auto Technology have a bullish opinion. Fueled by that overwhelming top-notch support, the small-cap Chinese auto supplier has kept a perfect rating for five months straight.

In late January, CAPS All-Star TMFBreakerJava brought a sense of Wonder to our CAPS community:  

This is a rapidly growing Chinese auto parts manufacturer with an already proven track record. The market for cars in China is ripe for explosive growth and the Chinese cars were recently launched on the global stage. Reasonable valuation means that this microcap has lots of upside potential.

As if to echo that bullish sentiment, yesterday's double-digit gain came after a Wall Street analyst reiterated his "Buy" rating, citing the continued growth of China's booming vehicle market.

The bullish takeaway?
Learn to combine the best of both small-cap and global investing strategies. By buying into proven small-caps domiciled in attractive foreign markets, you earn the double benefit of owning a business that has plenty of room to rocket, while getting paid in non-U.S.-denominated cash flows. As long as you're cognizant of price, international small caps offer a great way to play both offense and defense.

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 highly rated SiRF Technology (Nasdaq: SIRF) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Back in April 2007, for instance, CAPS All-Star jwfoster painted this not-so-pretty picture of MGIC Investment:   

They saw a 70% increase in insurance losses when housing didn't begin to tank until late in the Q. They have yet to write down or address their C-Bass venture in any meaningful way. Why would a shareholder want to own stock in a company that releases earnings when shareholders aren't paying attention, has mounting losses, and has subprime exposure they won't address or quantify?

Not surprisingly, shares of the embattled mortgage insurer are down a depressing 79% since that call. In fact, yesterday's plunge came after the company announced plans to boost its public offering by 20% (in other words, dilute even further), in order to expand business within the tough credit environment.   

The bearish lesson?
Master the Mosaic Theory method of analysis. Mosaic Theory simply involves collecting bits and pieces of info about a company -- both qualitative and quantitative -- and seeing whether they tell a story that makes sense. As jwfoster demonstrated perfectly, all the pieces of MGIC Investment could only lead to one reasonable conclusion: underperform.

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!