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 reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like low-rated satellite radio stocks Sirius (Nasdaq: SIRI) and XM. Stocks go up all the time, but unless you are able to predict the pop, what does it matter?  

Our community of more than 97,000 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 112 CAPS All-Stars who've rated Woodward Governor have a bullish opinion. Fueled by that overwhelming support, the Colorado-based manufacturer of energy control systems has kept a perfect rating for more than six months straight.

Back in May of 2007, CAPS All-Star Starrob shared some (legal) inside information with our community:  

I work as an Engineer on ships for over 20 years. In all of that time the only company that I can remember that makes governors is Woodward. They have a virtual monopoly on making governors. Governors control the speed of engines preventing them from overspeeding and keeping them at the correct speed for the correct load. All of the places where governors are necessary are in a bull market.

Woodward Governor is up 30% since that call. In fact, yesterday's pop came after the company delivered 34% earnings growth for the second quarter, on continued global demand for its power control products -- right in line with Starrob's take.

The bullish lesson?
Stay within your circle of competence. As CAPS' Starrob understands, one of the easiest ways to gain an edge on Wall Street is by sticking to sectors that you're already familiar with. As value guru Mohnish Pabrai said in a recent interview, "Most people, if they really think about it, have a business or an industry or two that they understand very well. ... People get into trouble when they work in a bank and they want to invest in Google."

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 UnitedHealth Group (NYSE: UNH) 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?
Three months ago, for instance, CAPS player fierroots touched on UAL's turbulent times:

[United] has a management team whose business model is predicated on oil prices of $45-$50 a barrel. No business model can work at $100 or more a barrel, and still keep costs within the purchasing power of the average man on the street.

Consistent with that call, shares of UAL plunged yesterday after the United Airlines parent company posted a whopping first-quarter loss of $537 million on soaring fuel costs. Management also said it would cut flights and 1,100 jobs in attempt to "overhaul every facet" of the business -- just as fierroots had predicted.

The bearish takeaway?
Keep your portfolio immune from airline sickness. Unless you're completely confident that a specific airline can indeed maintain outsized returns on capital -- either through differentiation or a low-cost structure -- the "gruesome" economics of the industry make it virtually impossible to make a decent long-term profit. In Warren Buffett's words, "The worst sort of business is one that grows rapidly, requires significant capital, and then earns little or no money. Think airlines."

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!