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 I selected those notable gainers as opposed to other winners making noise on Tuesday, like one-star mortgage insurers MBIA (NYSE:MBI) and Ambac: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 140,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98.1% of the 317 All-Star members who've rated FreightCar America have a bullish opinion of the stock. In March, one of those top Fools, Trimalerus, helped our community hop aboard the stock:

Analysts and CAPS members are optimistic about this stock and for good reasons. This rail car manufacturer will soon benefit from Obama's stimulus plan and international demand for rail cars is on the increase. This stock should be over $20 per share by this years end.

Consistent with that call, shares of FreightCar America surged yesterday after its second-quarter results easily topped Wall Street expectations on improved demand and lower expenses.

The bullish lesson?
Learn to be long-term greedy when others are short-term fearful. Going against the herd is never easy, but if you truly believe in a company's long-run potential, major downturns can offer the very best buying opportunities. As Warren Buffett says, "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

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 highly rated UnitedHealth (NYSE:UNH) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Late last week, for instance, CAPS member Option1307 wrote that Diedrich's price looked way too hot to handle:

This run has been unbelievable for [Diedrich] and is completely unjustified. They have had negative earnings for practically ever, and now all of a sudden we get a massive run b/c of a decent quarter or two. … [E]ventually sanity will regain hold and push this garbage back down.

Just as Option1307 had warned, shares of Diedrich plunged yesterday after the coffee specialist posted a 57% jump in quarterly revenue, yet still managed to disappoint investors.

The bearish takeaway?
Never confuse an improving price for improving prospects. As long as a company's profitability remains on shaky footing, short-term, speculation-driven run-ups can last for only so long. As Buffett reminds us, "For some reason, people take their cues from price action rather than from values. ... The dumbest reason in the world to buy a stock is because it's going up."

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 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!