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 reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like one-star-stock mortgage banks IndyMac Bancorp (NYSE: IMB) and Thornburg Mortgage. Stocks go up all the time, but unless you are able to predict the pop, what does it matter?   

Our community of more than 86,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, Inter Parfums still has a small following in CAPS, but so far, all 15 All-Stars who've rated the stock are bullish. Fueled by that top-notch support, the small-cap fragrance maker has kept a five-star rating for more than six straight months.

Back in January of 2007, CAPS player ISPYVALUE taught Fools how to make dollars from scents:

Owner/operators once again with solid cash flow and growth. Small enough company to grow with a product mix that won't deteriorate anytime soon. Women will continue to want to smell nice and this company allows them to do that while taking in some coin.

Inter Parfums is beating the market nicely since that call. In fact, yesterday's pop came after management posted a 57% jump in fourth-quarter profit and even raised 2008 guidance, thanks to early success with its launch schedule -- consistent with ISPYVALUE's optimistic take.

The bullish takeaway?
The biggest returns come in the smallest packages. As our team at Motley Fool Hidden Gems always says, singling out attractive small caps with strong cash flow, huge market opportunities, and high insider ownership is a reliable way to thump the market. While most megacap behemoths have their best days behind them, small-cap stocks with motivated managers have plenty of room to rocket.

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 UnitedHealth Group (NYSE: UNH) might have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Early in 2007, for instance, CAPS player cascadehigh built a bear case for Build-A-Bear Workshop:

Same store sales are falling across the board -- what does that tell you? People get tired of this concept -- one or two visits and they don't come back. Not a model for long-term growth.

Shares of the customized stuffed animal retailer have plunged 68% since that call. 

The bearish lesson?
Before you go for growth, make sure it's actually there. Extrapolating recent growth rates into the future can be extremely dangerous, so always focus on a company's market opportunity going forward rather than fixating on the past. As Warren Buffett says, "The investor of today does not profit from yesterday's growth."

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!