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 homebuilders Beazer and Brookfield. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 95.4% of the 1,370 members who've rated JA Solar have a bullish opinion of the stock. Just two months ago, one of those Fools, kodiakcowboy, forecast bright days ahead for the solar cell maker:

The cost of silicon has dropped dramatically which reflects the profits of the solar industry. [JA Solar] has positioned themselves to benefit dramatically from the lower pricing because of their efficiencies, partners, China subsidies, and new technology. They can mass produce their products, which will result in strong profits in the near future.

JA Solar is up more than 40% since that call. Of course, more than half of that gain has come over the past two days on management's expectation that fourth-quarter shipments should come in well above previous guidance, as well as an announced share repurchase program.

The bullish lesson?
There's really no substitute for knowing a business model cold. Like CAPS' kodiakcowboy demonstrates, the only way to consistently predict a company's fortunes is to understand how its sales and input costs interact with various industry and economic variables. As Warren Buffett once described his approach to stock picking, "Equity Investment Strategy = Evaluate the Business in Its Entirety."

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 Allied Irish Banks may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Two years ago, for instance, CAPS member chroot was already warning of the dangers lurking in PMI's portfolio:

The bond-insurance business is in trouble in general. PMI, one of the last insurers to fall spectacularly, is also one that has the furthest to fall. Its exposure to the sub-prime business is immense. Their entire business has dried up, and the number of defaults reaches staggering new highs every month, with no end currently in sight.

Including yesterday's plunge, shares of the embattled mortgage insurer are down a whopping 86% since that warning.

The bearish takeaway?
Always identify a stock's dangers before they come back to haunt you. One of the most common mistakes we make as investors is using fuzzy, surface-level arguments to defend a stock, while completely ignoring its actual risk exposures. As Buffett simply says, "Risk comes from not knowing what you're doing."

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!