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 DryShips (NASDAQ:DRYS). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 110,000 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 451 CAPS All-Stars who've rated Petrohawk Energy, only seven have a bearish opinion. Fueled by that support, the mid-cap oil and gas producer has kept a perfect five-star rating for over six months straight.

Less than two months ago, CAPS All-Star frytigre explained why it was Petrohawk's perfect time:

With oil prices the way they are and will continue to become in the foreseeable future, these gap companies are raking it in with low overhead. The giants want to gobble them up, but are afraid to invest a good chunk of change in case there is a slow-down in the oil industry. Meanwhile companies like Petrohawk have more work than they can handle.

Petrohawk is already up 60% since that call, and an amazing 137% over the last year.

The bullish lesson?
Learn to hit the sweet spot with mid-cap stocks. Focusing your search within the mid-cap universe (market caps between $2 billion and $10 billion) can typically provide the safety of proven, well-established companies, while still leaving plenty of room for growth. As CAPS' frytigre understands, nothing is better than a stock with the financial strength of a blue chip, combined with the multibagger potential of a small cap.

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 plunge in five-star stock Infinera (NASDAQ:INFN) 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 month, for instance, blackeye101, with the help of renowned CAPS All-Star floridabuilder, built this bearish case against M/I Homes:

Read some floridabuilder and learn about the downward spiral of home prices. The more foreclosures the higher the pressure on home prices, which leads to more foreclosures. How can homebuilders compete with foreclosed prices? No, you bulls, that was a rhetorical question.

Consistent with that call, shares of M/I Homes, along with the rest of the housing sector, plunged yesterday after discouraging inflation numbers signaled that higher interest rates – and, in turn, continued defaults -- could be on the way.

The bearish takeaway?
Always pay attention to risk and effect in its totality. One of the biggest mistakes we make as investors is failing to consider second, third, and higher-order effects when analyzing a company's risk exposures. As Charlie Munger once wrote, "This defect is quite understandable, because the consequences have consequences, and the consequences of the consequences have consequences, and so on."

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!