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, instead of other big-name winners making noise on Tuesday, for instance, the one-star investment banks Bear Stearns and Lehman Brothers (NYSE: LEH). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 89,000 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: In its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, of the 61 CAPS All-Stars who've rated FactSet Research Systems, only one has a bearish opinion. Fueled by that top-notch support, the Connecticut-based financial software provider has kept a perfect rating for over six months straight.

Late last December, CAPS All-Star Slappster laid the facts down on FactSet:

Great business -- look at ROA and ROIC. 95% client retention indicates a "sticky" business with high switching costs and high customer satisfaction ... creating a moat. Widening asset class products from straight equities to fixed assets like bonds and derivatives. Also positioned to increase sales internationally.

FactSet is edging the market since that call. Of course, yesterday's pop came after the company reported double-digit profit growth for the second quarter on strong global sales. Management said it expects third-quarter sales to top Wall Street's estimates -- right in line with Slappster's optimistic take.  

The bullish takeaway?
Always be on the hunt for huge economic moats. A sustainable competitive advantage is a great indicator of long-term investment success, so if you've identified one of the more powerful ones at play -- intangible assets, cost advantages, network effects, or high-switching costs -- you might be on to something. As Warren Buffett once described an ideal acquisition for Berkshire Hathaway, "Long-term competitive advantage in a stable industry is what we seek in a business."

And now, 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 Dolby Laboratories (NYSE: DLB) may 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?
Just two weeks ago, for instance, CAPS All-Star icanpickm shared these bearish musings on Basin Water:

I think Basin is facing the cold hard truth that removing ions in the ppb [parts per billion] range is very hard and very expensive. ... The unfortunate reality of the water treatment business is there are no short cuts or silver bullets, yet ... 

Based on these inherent fundamental challenges with their business model and the water treatment business in general, I think this company is worth less than the cash on their books.

Shares of the California water treatment company are already down 30% since that call. In fact, yesterday's plunge came after the company posted a fourth-quarter loss of $1.4 million -- consistent with icanpickm's gloomy outlook.

The bearish lesson?
When it comes to investing, profits speak louder than words. Exciting new technologies, like those in the field of contaminated water treatment, certainly have huge prospects for growth, but that doesn't mean shareholders will be rewarded. As icanpickm mentioned, if a particular business has little chance of ever covering its cost of capital, the shares are probably worth no more than tangible asset value.

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, above all else, 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!