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:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like one-star financials Countrywide Financial (NYSE: CFC) and IndyMac Bancorp. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 83,000 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, out of the 51 CAPS All-Stars who've rated Anixter International, only a single one is bearish. Last April, I even found the electrical and cable products distributor buried deep in the CAPS five-star bargain bin.   

This outperform pitch -- by CAPS player Patrick6k back in January of 2007 -- tipped many players to the stock's "hidden" qualities.

Anixter Intl. Inc. is one of those quiet stealthy growers that should be in everyone's portfolio, but never seems to be. With a massive array of communication and security products in its profit making arsenal and a great management crew, I think this will prove to be a great long term investment. These shares also currently have an intrinsic value of $70 to $75 per share based on current earnings projections.

Anixter International is up 27% since that call. Of course, a big chunk of those gains came after management reported a 34% surge in its fourth-quarter profit yesterday, thumping Wall Street's estimates in the process. Anixter's shares closed the day at $68.85 -- eerily close to the intrinsic value range given by CAPS' Patrick6k one year ago.

The bullish takeaway? Always seek a margin of safety. Stocks can be hazardous to your wealth, but by buying quality businesses at a fraction of what they're worth, you can dramatically lower risk while maximizing return. As Berkshire Hathaway's Charlie Munger once said, "All intelligent investing is value investing -- to acquire more than you are paying for."

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 yesterday's drop in highly rated Intuitive Surgical (Nasdaq: ISRG) 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 short but lesson-laden ICU Medical bear call by CAPS player richbatt a year ago: "Classic early warning sign: A/R [accounts receivable] and inventory growing much faster than sales."

Consistent with richbatt's red flags, shares of the medical-device maker plunged to a new 52-week low yesterday, after the company reported a 12% decline in its fourth-quarter earnings. Management even cited sagging sales of its critical-care products as the primary reason for the earnings drop.

The bearish lesson? All bottom lines aren't created equal. By becoming familiar with the telltale characteristics of low-quality profits, you give yourself a better chance of sidestepping massive earnings disappointments. As CAPS' richbatt nicely demonstrated, just a couple of simple balance sheet insights can be a good indication of bad things to come.

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, 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!