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 one-star financials Washington Mutual and Lehman Brothers (NYSE:LEH). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 110,000 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 727 CAPS All-Stars who've rated Motley Fool Stock Advisor pick Activision Blizzard, 96% have a bullish opinion. On the strength of that overwhelming support, the video game publishing giant has been a five-star stock for over six months straight.

Three weeks ago, CAPS member drewkr13 only had three things to say about the company: "Guitar Hero, Worlds or Warcraft, and now Kung Fu Panda. Enough said!"

Completely consistent with that concise call, shares of Activision popped yesterday after management boosted its first-quarter profit forecast on Monday, fueled by the North American release of Kung Fu Panda and two record breaking launches of its Guitar Hero franchise.

The bullish lesson?
The simplest and most obvious reasons to buy a stock are often all you need to make money. As CAPS' drewkr13 understands, when a company owns such powerful, tangible, and wildly popular brands as Activision Blizzard, it's really not that necessary to overthink the investment. As long as you understand the business model and can estimate the market potential within reason, buying into brands that you know and love can be a great way to gain an edge on the street.

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 members. So although yesterday's drop in five-star stock ViroPharma (NASDAQ:VPHM) 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?
Just two days ago, for instance, CAPS All-Star ErsatzE kept the insightful Fannie and Freddie CAPS commentary going with this pitch:

To all the people flagging this as "outperform" because the government is stepping in: understand that the federal government pouring a ton of money into [Freddie Mac / Fannie Mae] and them issuing additional shares to raise capital (a big "if" at this point, of course) will push down the value of the common shares due to dilution. These are not going anywhere good anytime soon.

In line with that call, shares of Fannie and Freddie continued to get beaten yesterday, as worries over how investors and taxpayers would be affected by a government rescue plan persisted.

The bearish takeaway?
There's no such thing as a free lunch. As CAPS' ErsatzE understands, a bailout by the U.S. government doesn't necessarily mean that current shareholders stand to benefit. Unless you're truly able to discount the massive dilution effects that are certain to arise from the rescue plan (whatever it ends up being), buying into Fannie and Freddie is really just a gamble.

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!