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 Motorola (NYSE:MOT). 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, 97% of the 418 members who've rated Caraco have a bullish opinion of the stock. Less than two months ago, one of those Fools, SeekBalance, updated our community on the generic-drug maker's compliance issues:

The FDA's shutdown of [Caraco's] manufacturing operations has scared investors away, but lots of recent capital spending and last week's press release imply that the FDA will allow [Caraco] to resume production sometime soon. Even without manufacturing, [Caraco] has continued to generate a positive operating cash flow. ... So we're pretty safe on the downside, and we can expect a big [price per share] bump with the resumption of manufacturing operations.

Including yesterday's market-bucking pop, Caraco has risen over 25% since that call.

The bullish lesson?
The most important job you have as an investor is to quantify a stock's upside and downside. At the very least, you should always make sure you're being compensated appropriately for the risks you're taking on. If a stock's potential payoff seems generous compared to the chance of loss -- as CAPS' SeekBalance surmised with Caraco -- it's probably best to take Mr. Market up on his offer.

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 Mechel may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Last month, for instance, CAPS member adartmouth warned Fools about banking on RBS:

[M]aybe an ENORMOUS rights issue will save the stock from bankruptcy, but the equity will be diluted. ... [T]his is the Lehman that was allowed to carry on racking up losses, combined with the Northern Rock and a bit of CIT. [T]hrow in some [commercial real estate] catastrophes, and a bit of GE style unsustainable government financing, and you have a potential zero here.

Including yesterday's plunge, RBS, reported to have the largest exposure to the ailing Dubai World, has already fallen 25% since that warning.

The bearish takeaway?
Always identify a stock's dangers before they come back to haunt you. One of the most common mistakes we make as investors is using fuzzy, surface-level arguments to defend a given company, while completely ignoring its actual risk exposures. As Warren Buffett simply says, "Risk comes from not knowing what you're doing."

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 become a more Foolish investor.

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