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 top ratings of four or five stars:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Tuesday, like low-rated Barnes & Noble. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 92% of the 1,813 members who've rated Motley Fool Rule Breakers pick VMware have a bullish opinion of the stock. Just last month, one of those Fools, gt1135, offered some real insight into the virtual computing specialist:

[VMware] is a leader in this industry. In my personal experience with their products they far outshine other competitors in the market such as [Microsoft (NASDAQ:MSFT)] and Citrix. I suspect over the next 5 years this particular part of the IT industry could triple in size. All players will benefit, but if VMware can sustain their position they could be a huge play in the market.

Consistent with that call, shares of VMware surged yesterday after reporting fourth-quarter results that easily topped Wall Street estimates.

The bullish lesson?
Always stay within your circle of competence. As CAPS' gt1135 demonstrates, one of the easiest ways to gain an edge on Wall Street is by focusing on industries that you're already familiar with. As value guru Mohnish Pabrai once said, "If people are patient -- waiting for the right price -- and invest only in areas that they understand, there won't be too many numbers to crunch."

And now for the losers ...
Of course, winning isn't everything in the stock market. Here are five of Tuesday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in highly rated U.S. Steel may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Three weeks ago, for instance, CAPS member DarthMaul09 warned Fools about banking on Regions Financial: "The rise in regional bank stocks today seems a bit unreasonable. If the economy was truly recovering this might be a reasonable long term bet but too much uncertainty remains for this rise to be anything other than a speculative bet."

In line with that bearishness, shares of the regional bank sank yesterday, after posting a wider-than-expected quarterly loss of $606 million on rising loan-related charge-offs.

The bearish takeaway?
Never confuse an improving price with improving prospects. If a company's underlying fundamentals continue to deteriorate, short-term, momentum-driven run-ups can last for only so long. As Warren Buffett observes, "For some reason, people take their cues from price action rather than from values. ... The dumbest reason in the world to buy a stock is because it's going up."

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 identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you retire wealthy.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!