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. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 125,000 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 291 All-Star members who've rated Precision Castparts have a bullish opinion of the stock. Before yesterday's open, one of those Fools, TMFSmashy, explained why the aircraft-component maker was a big favorite to outperform:

OK, I'll bite. This is a fabulous industrial company at a very fair price. Strong historical compounder of shareholder's equity and routine generator of excess cash.

Consistent with that call, shares of Precision popped yesterday after the company posted a better-than-expected quarterly profit, driven by healthy sales of its fastener products.

The bullish lesson?
If you plan to play the turnaround game, be sure to pick up broken stocks -- not broken companies. Buying into battered stocks isn't easy on the stomach, but if you focus on businesses with solid fundamentals, durable competitive moats, and proven track records of shareholder value creation, the odds of a turnaround are that much better. As Warren Buffett recently wrote, "Investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense."

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 nasty plunge in five-star stock 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 an average of 11.4%, annualized.

Did CAPS call the fall?
In April, for instance, CAPS member MaeMonroe was already raising the red flag on PNC Financial Services:

PNC has held their own during this financial crunch, but the crunch is not over. They are overexposed in some of their Northeast markets. They have taken on 2 projects in the Pittsburgh area that are running over budget. Three PNC Plaza will now cost $200 million, up from the original budget of $179. AND ... this project is subsidized with public (ie: taxpayer) funds.

Not surprisingly, shares of PNC are down 67% since that call. Of course, yesterday's 41% drop came after an analyst downgrade, and as investors pounded the entire financial sector.

The bearish takeaway?
Never confuse a resilient price for a resistant business model. As long as a company's underlying economics continue to deteriorate, it's only a matter of time before the stock starts to reflect it. By doing your own homework and ignoring Mr. Market's current opinion, as MaeMonroe advised, you give yourself a better chance of coming to an objective and realistic view of a company's risk/reward profile.

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, 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!