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 low-rated financials Washington Mutual and Wachovia (NYSE:WB). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 105,000 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, out of the 320 CAPS All-Stars who've rated Grey Wolf, only six have a bearish opinion. Fueled by that Foolish support, the onshore oil and natural gas driller has kept a five-star rating for over six months straight.

In late March, CAPS All-Star dlindsay2000 explained why Fools needn't be frightened of the Grey Wolf:

Grey Wolf, Inc., headquartered in Houston, Texas, is a leading provider of contract oil and gas land drilling services in the best natural gas producing regions in the United States... Grey Wolf focuses on domestic drilling, which is at its highest levels since Oil City Pa was put on the map... This should be an outstanding stock pick.

Grey Wolf is up an impressive 45% since that call. In fact, yesterday's pop came after Global Gains pick Precision Drilling Trust (NYSE:PDS) offered to buy the company for $9 per share as a way to increase its U.S. exposure -- exactly why CAPS' dlindsay2000 liked Grey Wolf all along.

The bullish lesson?
Always think like a business owner. All sorts of things can depress a stock's price in the short term, but the true investor is able to focus on the factors that really count over time. By buying well-positioned companies in timely industries, and at bargain prices, you give yourself plenty of "upside" opportunities -- including being bought out by the big boys -- to earn an outsized return.

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 highly rated gold stocks Kinross and Yamana (NYSE:AUY) 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?
Last November, for instance, CAPS All-Star TMFDeej questioned the viability of VeraSun Energy's business model:

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.

Shares of VeraSun are down more than 50% since that call. In fact, the entire ethanol sector sank yesterday as mounting evidence, including bad weather and rising global demand for food, pointed toward even further increases in corn prices.

The bearish takeaway?
Don't believe the hype. Alternative energy plays like ethanol fuel may sound exciting, but without solid evidence of long-term economic feasibility, it would be tough to classify them as prudent investments. As Charlie Munger once candidly put it, "Running cars on corn is about the stupidest thing I ever heard of. Our government is under tremendous political pressure [to support corn ethanol], even though it makes no sense."

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, tens of 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!