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 instead of other big-name winners making noise on Tuesday, like one-star homebuilders Beazer Homes (NYSE: BZH) and Hovnanian Enterprises. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 96,000 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, out of the 70 CAPS All-Stars who've rated Exponent so far, only two have a bearish opinion. Fueled by that top-Fool support, the California-based science and engineering consulting firm has kept a five-star rating for more than six months straight.

One year ago, CAPS All-Star PearlandTX engineered this simple outperform pitch for our community:  

Consistent financial performance, net margins almost 9%, P/E reasonable at 24, using cash to buy back stock, interesting market space. Could become a takeover target.

Exponent is up more than 60% since that call. In fact, yesterday's big pop came after the company posted yet another quarter of impressive profit growth: First-quarter earnings jumped 26% on strong sales across most of its segments -- consistent with PearlandTX's bullish line of thinking.

The bullish takeaway?
Always think like a business owner. All sorts of psychological and economic noise can depress a company's stock price in the short term, but the key to successful investing is focusing on the factors that really count over time. As PearlandTX understood, pouncing on consistently profitable, steadily growing, cash-generating companies at discounted prices gives you plenty of chance to profit no matter what the economy does.  

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 plunge in five-star stock Sigma Designs (Nasdaq: SIGM) 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?
Last January, for instance, CAPS All-Star dude59touched on the merits of buying into Northwest Airlines based purely on its proposed deal with Delta: "A merger of two companies that are both going BK does NOT make this attractive if you can think."

Consistent with that piercing opinion, shares of both one-star airliners sank yesterday as investors panned the details of their long-awaited megamerger. Apparently, the $17.7 billion deal won't be able to boost revenue as much as Wall Street had hoped -- just like dude59 had figured all along.

The bearish lesson?
Always know when one plus one doesn't make three. There are plenty of good reasons for a merger, including gained economies of scale and the elimination of operating inefficiencies, but simply becoming "the world's biggest" isn't one of them. As CAPS' dude59 realized, even massive size isn't much of a defense against the massive fixed costs, union strength, and exposure to commodity pricing which underline the airline business. 

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!