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 I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday, such as low-rated Freddie Mac (NYSE:FRE): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 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 971 CAPS members who've rated Motley Fool Rule Breakers pick Infinera have a bullish opinion of the stock. In September, one of those Fools, TMFBreakerThiel, explained why the optical-networking company seemed relatively attractive: "Starting to look like its priced as a commodity component maker, and it's not. Almost identical P/E and similar mkt cap to [Ciena (NASDAQ:CIEN)] ... but a lot less troubled."

With the help of yesterday's surge, Infinera is beating the market by 16% since that call.

The bullish lesson?
Learn to apply the theory of investment relativity when analyzing stocks. There are several different methods for valuing a company, but comparing a stock's price-to-earnings ratio to that of its peers is one of the most straightforward (and useful) ways to sniff out a bargain. As long as you're cognizant of its many limitations, relative valuation should be at least one step in your investment-appraisal process. 

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 plunge in highly rated Allied Irish Banks (NYSE:AIB) may have caught our community off guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped by an average of 11.4%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS member palumbah made this bearish prediction on Saks:

This will be a bad Christmas shopping season for Saks. ... [Clothing on display] is very '60s with little embellishment, nothing from any couture lines, and not a Christian [Louboutin] in sight. ... [L]uxury retailers only bank on conservative clothing when they realize their customers have to work harder to rationalize their purchases and that they will likely have lower sales. My suspicions were confirmed when I read that Saks is cutting its sales projections for the coming quarter.

Not surprisingly, shares of the luxury department-store operator are already down 48% since that call. In fact, yesterday's drop came after the company posted a third-quarter loss of $42.8 million and warned of a dismal holiday season -- just as palumbah had.

The bearish takeaway?
Master the Mosaic Theory method of analysis. Mosaic Theory simply involves collecting bits and pieces of info about a company -- both qualitative and quantitative -- and figuring out whether they tell a story that makes sense. As CAPS' palumbah demonstrated perfectly, all of the visits to Saks could lead to only one reasonable conclusion: underperform.

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!