Tuesday's Biggest Stock Stars

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

Without further ado:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday -- like Blockbuster (NYSE:BBI) and Pacific Ethanol -- is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 77,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, all 33 CAPS All-Stars who've rated Perrigo are bullish. On the strength of that Foolish support, the Michigan-based generic-drug maker has maintained a five-star rating for the last five months straight.   

This bull pitch by CAPS All-Star Capsperson early last September highlighted a few important points for our community:

This company went public about 15 years ago. They have a gastrointestinal med that is switching from Rx to OTC (over-the-counter) which should benefit them. Biggest customer is Wal-Mart (NYSE:WMT), second biggest customer is CVS. 20%+ exposure overseas. I think it's a good buy.

Perrigo is up a whopping 58% since that call. In fact, yesterday's pop came after the FDA cleared its partner, Dexcel Pharma Technologies, for Omeprazole, a drug used to treat acid reflux. And as the exclusive marketer and distributor of Omeprazole in the U.S., Perrigo expects to add roughly $0.20 to $0.25 in earnings per share for fiscal 2008.

The bullish takeaway? When looking at a business, try to analyze the alliances it has in place. Sometimes, just a few successful deals can account for a healthy portion of a company's business. By figuring out well in advance how a company stands to benefit from a partner's good fortune, you'll be ahead of most investors in capturing those big gains.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Tuesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while Tuesday's drop in four-star stock Yingli Green Energy (NYSE:YGE) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this WCI Communities underperform pitch made just a couple of days ago by CAPS All-Star TheGarcipian:

Profit & operating margins (currently -14.3% and -7.2%) will continue to erode, Quarterly Rev. Growth of -61% isn't exactly inspiring, and neither are the RoA (-1.5%) and the RoE (-20.1%). They have a huge Debt/Equity ratio of 217.5%, and despite the $7.1M in cash (which will bleed fast in this market), they will have to sell quite a few homes at cost or below just to meet their day-to-day operational needs. Look for a continued downslide for the next 4-6 months.

The Florida-based homebuilder, not surprisingly, is down a depressing 81% over the last six months.

The bearish lesson? You can't always trust book value. WCI has traded for less than half of its book value for quite some time, so it would've been easy to interpret it as a "no-brainer" bargain. But, as TheGarcipian correctly points out, deteriorating fundamentals, massive leverage, and the likely sales of inventory below cost make its stated book value -- along with its share price -- pretty tough to bank on.

The final Foolish move
Investors often focus strictly on stock price movements (or the results), without realizing that developing a proper stock-picking process counts most.

Over at Motley Fool CAPS, tens of 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!