Tuesday's Biggest Stock Stars

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

Our community of more than 120,000 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: In the first 20 months since its inception, five-star stocks have beaten the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 1,173 CAPS members who've rated Motley Fool Stock Advisor pick optionsXpress have a bullish opinion of the stock.

Just last week, CAPS member pjani06 explained why the provider of options and futures trading looked like an attractive bull call:

CHEAP! brokerage that has been hit hard without much merit since it has high amounts of cash, is NOT leveraged, stable earnings, and benefits from the volatile world market environment we are experiencing right now! It is insider held and pays a dividend!

Consistent with that pitch, shares of optionsXpress surged yesterday after reporting better-than-expected third-quarter results, driven by strong growth in new customer accounts.  

The bullish lesson?
Take advantage when Mr. Market throws an attractive baby out with the bathwater. When investors become panicked, they tend to sell stocks haphazardly, based simply on the sector they belong to, rather than looking at things (especially balance sheets) on a case-by-case basis. Our CAPS community has long believed that optionsXpress would not only survive, but thrive, through all of the market volatility, so the stock's recent drop provided Fools with a promising opportunity.

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:  

While yesterday's drop in five-star miners Freeport-McMoRan (NYSE:FCX) and Taseko Mines may have caught our community off guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Back in late 2006, for instance, CAPS member Ragnich was already warning our community on the dangers of General Growth Properties:

Overly reliant on short term, floating rate debt. Purchased several companies at huge premiums to the Net Asset Value of those companies' assets. The company has made its money during the REIT run by engineering returns through the debt markets using risky floating rate debt instruments, not by operating efficiently.

Not surprisingly, shares of the commercial REIT are down 89% since that call. In fact, the stock has plunged 20% since Monday, when The Wall Street Journal said General Growth was looking to sell up to $2 billion in preferred shares to ease its debt burden -- consistent with Ragnich's warnings.

The bearish takeaway?
Always try to spot a company's hazardous exposures before you get battered by them. When business is booming, it's easy to become complacent as an investor, but that's precisely when you need to make sure management's appetite for risk isn't getting in the way of sustainable growth. Like Warren Buffett says, "You only find out who is swimming naked when the tide goes out."

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!