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 A123 Systems. 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, 95.8% of the 5,514 members who've rated Motley Fool Hidden Gems pick Nuance have a bullish opinion of the stock. In May, one of those Fools, DepthMigration, helped investors read the bull case loud and clear:

[Nuance] is presently profitable, has a good deal of cash on hand, and quite manageable debt. The upside? Their [voice recognition] technologies are the best in the industry, and are improving rapidly. [Voice recognition] will be ubiquitous in 5 years, and [Nuance] is at the forefront.

Consistent with that call, shares of Nuance surged yesterday after its quarterly profit topped Wall Street estimates on strong product and licensing sales growth.

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' DepthMigration surmised with Nuance -- 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 solar stocks Yingli Green (NYSE:YGE) and LDK Solar may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Late last month, for instance, CAPS All-Star wbinv2100 urged Fools to close the book on Borders: "A war between Amazon (NASDAQ:AMZN) and [Wal-Mart Stores] in books is going to take a lot of water out of the pool. [Barnes & Noble] may be the brick and mortar chain to survive, but I don't believe Borders is going to make it."

In line with that warning, shares of Borders and Barnes & Noble sank yesterday after the book retailers both reported quarterly losses and issued a gloomy holiday season outlook on intensifying competition.

The bearish takeaway?
Never underestimate the protection that a meaningful moat provides. Without a strong economic advantage, a company's returns on capital are constantly exposed to the ravages of stronger, nimbler, and smarter competition. As Warren Buffett reminds us, "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."

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!