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 top ratings of four or five stars:

There's a reason why I selected those notable gainers, as opposed to other winners making noise on Tuesday, like low-rated casino stocks MGM Mirage (NYSE:MGM) and Las Vegas Sands. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 130,000 CAPS Fools considers its "high-star" stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 93% of the 808 members who've rated Headwaters have a bullish opinion of the stock. Just last week, one of those Fools, All-Star Babachrono, predicted that the energy and building-products company would soon have its head above water:

Recently there has been lots of insider buying. … Earnings have dropped since Q3 '07, and are at least 2 quarters from projected positive EPS. Believe it will improve as the housing market picks up and then with the push for clean energy. Looks to me to have more upside than down, going to get in here low and watch.

Consistent with that call, shares of Headwaters surged yesterday after its first-quarter loss widened on a goodwill charge, but it forecasted better-than-expected earnings for the rest of the year.

The bullish lesson?
The most important job you have as an investor is to quantify a stock's upside and downside. At the very least, you should always make sure you're being compensated appropriately for the risks you're taking on. If a stock's potential payoff seems generous compared to the chance of loss -- as Babachrono surmised with Headwaters -- it's best to take Mr. Market up on his offer.

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

While yesterday's drop in five-star stock Chesapeake Energy (NYSE:CHK) may have caught our community off-guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Five days ago, for instance, CAPS member ww2004 read Borders Group from a customer's viewpoint:

Over the past three years I noticed the vibe has changed in their stores and they just don't have a prosperous feel to them. [Amazon (NASDAQ:AMZN)] has become my preferred source, like for so many others. Now the depressed economy looks like it will put an end to this company.

After yesterday's drop, shares of the books, music, and movie retailer are down 10% since that call.

The bearish takeaway?
Trust your own eyes above all else. Just as it might pay to buy what you know (and enjoy), it's probably a good idea to stay away from stocks whose services are increasingly disappointing you. Due diligence is always required, but as CAPS' ww2004 understands, if you're not a satisfied customer, it might be a stretch to think you'll be a satisfied investor. 

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!