Tuesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Tuesday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday, like low-rated financials National City (NYSE:NCC) and Morgan Stanley. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 98% of the 308 CAPS All-Stars who've rated Motley Fool Hidden Gems pick Sadia have a bullish opinion of the stock.

Just last week, CAPS member JMJeffrey explained why the South American meat producer looked so succulent:

[G]etting slaughtered (could not resist) due to their own hedging mistake and the general market panic. They are the major meat producer Brazil and have developed a processed meat business that they are exporting as well. ... Yes, they have more or less wiped out a whole year of profits due to their over zealous hedging practice but I see this as a 'one-off' event and that the baby is getting flushed down the tube with the bath water.

Consistent with that call, shares of Sadia are up an amazing 41% over the past week.

The bullish lesson?
Whenever you see a company's shares in freefall, ask yourself, "What's wrong with this company?" As CAPS' JMJeffrey understands, if the answer is simply a one-time mistake by management, and you feel the company's core business remains sound, it might be a good opportunity to buy quality on the cheap. In Warren Buffett's words, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are five of Tuesday's biggest one-star decliners:   

While yesterday's drop in five-star stock PepsiCo (NYSE:PEP) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have fallen an average of 11.4%, annualized.

Did CAPS call the fall?
In February, for instance, CAPS member Danimal13Valpo delivered some bearish thoughts on Domino's Pizza:

Domino's lost the only competitve advantage it had when it decided to raise the price of the 555 Deal to $5.55 a piece and Pizza Hut took the plunge to $5 a pizza. Pizza Hut has stuffed crust, Papa John's has long-standing specialty pizzas and chicken strips that don't cost an arm and a leg, and Domino's has literally NOTHING to offer that other pizza company's don't.

Not surprisingly, shares of the pizza company are down 45% since that call. In fact, Domino's shed a quarter of its value yesterday after reporting slumping sales and an 8% drop in third-quarter profit.

The bearish takeaway?
Never let your portfolio get stuck in the middle. Generally speaking, businesses can gain a competitive advantage either by selling at the lowest price, or by differentiating their product in consumers' minds. As CAPS' Danimal13Valpo understands, if your portfolio is littered with companies caught between a low-cost rock and a high-quality hard place, your returns will likely get squished in the process.

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!

In the coming weeks, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. The service, which just launched, will rely heavily on proprietary CAPS “community intelligence” data to establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.