Tuesday's Winners and Losers

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Tuesday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, out of the 501 CAPS All-Stars who've rated online-gaming company GigaMedia, an overwhelming 98% have a bullish opinion.

Less than two months ago, CAPS All-Star TMFRedwood brought the giga-sized opportunity to our community's attention:

Giga is unfathomably cheap, trading at 19x 2007 earnings and 15x 2008 [estimated] enterprise value-to-earnings. These multiples for a company that grew net income by 43% in Q1 2008. This rate probably isn't sustainable for four years, so conservatively modeling 20% growth for two years and 15% growth for the next two years, one could reasonably expect $90 million in earnings in 2012. Assuming a 15x multiple, the company would trade at $27 per share, or $22 in present value.

Consistent with that call, shares of GigaMedia popped yesterday after posting better-than-expected second-quarter earnings, fueled by a 31% rise in revenue.

The bullish lesson?
Don't just assume that a company with a high historical growth rate is priced for perfection. Oftentimes, investors remain too skeptical about a company's prospects and fail to fully discount its true potential. Just as CAPS' TMFRedwood knows, if a growth stock looks cheap under the most conservative of estimates, you might just have an attractive low-risk, high-reward situation on your hands.

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are five of Tuesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS members, and for pretty good reason: Since CAPS started, one-star stocks have dropped by an average of 11.4%, annualized.

Did CAPS call the fall?
Just last week, for instance, CAPS All-Star zubikov shared some bearish worries over Wachovia:

The downside is that they have no distinct competitive edge in retail banking, they still have the burden of bad debt, home sales will continue to slump and credit markets will weaken. My observation leads me to believe that they are spending way too much on advertising and new branches; yet they have no concrete plan to grow as they shut down their core lending businesses one piece at a time. The upside? The blue and green paint job looks cool on the NYC tour buses. Also their branches have free coffee and hard candy.

In line with that bear call, shares of the banking giant plunged yesterday after it said it needed to cut 600 more jobs than previously planned and that its second-quarter loss will be bigger than expected.  

The bearish takeaway?
What goes down doesn't always have to come back up. As CAPS' zubikov understands, playing with tricky turnarounds can be profitable, but only if you're confident in management's plan to genuinely turn things around. If all you see is a worsening environment, deteriorating fundamentals, and no concrete plan, then trying to catch a falling knife will only likely lead to pain.

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!