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:

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 homebuilders Hovnanian Enterprises and Standard Pacific. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 85,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. 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 873 CAPS players who've chimed in on Motley Fool Hidden Gems pick Sun Hydraulics, a whopping 99% are bullish. On the strength of that massive support, the small-cap provider of fluid power systems equipment has been a five-star stock for over six months straight.

This past January, CAPS All-Star pencils2 even shed some sunlight on Sun's slumping stock:

"A lot of things seem to be clicking for Sun operation-wise... However, grumpy old Mr. Market doesn't seem to be looking at that... And did I mention that insiders own 31% of all shares outstanding? I can't help but think this is a great time to buy a business that should do very well as economies around the globe develop and expand."

Sun Hydraulics is up 20% since that call. Of course, most of that gain came yesterday after management reported impressive 36% profit growth in fiscal 2007, fueled primarily by strong demand in Europe and Asia -- consistent with pencils2's take.

The bullish takeaway?
When the stock of a quality company starts to drop, try to figure out why. If Mr. Market's punishment seems to make no sense, given the underlying fundamentals, it might be the perfect time to jump in. As Warren Buffett said, "The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price."

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 although yesterday's drop in five-star stock FLIR Systems (FLIR) 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?
Back in November, for instance, CAPS All-Star TMFDeej shared these bearish thoughts on ethanol investing:  

"The cost of corn is up and the price of ethanol is going down... Unless there is some sort of miraculous technological innovation that makes ethanol production much, much more efficient, eventually everyone will realize that ethanol is a joke. Until then, the industry has a great deal of oversupply that will prevent producers from making money."

In line with TMFDeej's warning, shares of one-star ethanol stocks US BioEnergyandVerasun Energy plunged more than 13% yesterday on fears that record-high corn prices will do their part to squeeze margins even further.

The bearish lesson?
Always be skeptical of the "next big thing." Exciting innovations such as alternative energy might indeed shake up the world, but as TMFDeej pointed out, that's a far cry from actually getting paid for it as an investor. Investing is all about playing the odds, and sticking to solid stocks with a long history of profitability is one of the best ways to do that.

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!