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 I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as one-star airliners UAL (NASDAQ:UAUA) and US Airways Group. 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 proved its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 213 CAPS All-Stars who've rated Woodward Governor, only three have a bearish opinion. Fueled by that Foolish support, the Colorado-based maker of energy control systems has kept an impressive five-star rating for over six months straight.

Two months ago, CAPS member escarzamd explained why we should always follow "The Governor":

I just think this is a solidly run, forward thinking company well-positioned for the future. Books look great, and this play is towards fixed energy provision, notably in wind. I don't think oil is ever coming down, which makes recent support look valid. Probably 30 days late, but I am a rookie!

Consistent with that bull call, shares of Woodward surged yesterday after the company posted third-quarter earnings growth of 38% and raised guidance for fiscal 2008 on strong order volume.

The bullish lesson?
Don't just assume that a company trading near its 52-week highs is priced for perfection. Oftentimes, investors simply remain anchored to historic growth rates and fail to fully discount a company's true potential. As CAPS' escarzamd understands, if a company's long-term prospects continue to be excellent, buying a month too late (or too soon) shouldn't make a whole lot of difference over time.

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 members. So although yesterday's drop in five-star stock Chesapeake Energy (NYSE:CHK) 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?
In December 2007, for instance, CAPS All-Star DemonDoug planted an underperform call on Assured Guaranty simply because he was "Negative on all bond insurers."

Well, in line with that concise call, shares of Assured Guaranty plunged 40% yesterday after the bond insurer said it expects earnings to drop, while Moody's placed its Aaa rating on review for a possible downgrade.

The bearish takeaway?
Always learn about a company's operating environment before it comes back to haunt you. We Fools don't necessarily advocate a top-down approach to stock picking, but as we've seen with the bond insurers, jumping into a troubled industry at the wrong time can do some serious damage to your portfolio. As CAPS' DemonDoug understands, when a given industry is spiraling, it's hard for even the strongest not to feel the impact.  

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!