Tuesday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight Tuesday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

There's a simple reason why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Tuesday, like one-star stock Ambac Financial (NYSE:ABK). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 110,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 229 CAPS players who've rated Anthracite Capital, just nine have a bearish opinion. Fueled by that growing Foolish support, the New York-based commercial real estate investment trust (REIT) recently earned its five-star rating.

In March, CAPS player fewli0 brought the bargain opportunity to our community's attention:

Stock dragged down with the sector unfairly. It is true that real estate values continue to drop, but commercial real estate isn't nearly as large a bubble as residential is. Last week's earnings report was very positive, the dividend held steady at nearly 20% yield from today's price, with guidance that it will continue to do so. Recently reported book value is over ten dollars. Commercial mortgage delinquencies remain at record low levels.

Shares of Anthracite are already up 30% since that call.

The bullish lesson?
Take advantage when Mr. Market throws a quality baby out with the bathwater. When things get shaky, investors tend to sell stocks haphazardly, based simply on the industry they belong to, rather than taking things on a case-by-case basis. As CAPS' fewli0 demonstrates, searching in specific areas of a slumping sector, where things aren't even that bad, can be a great way to find genuine bargains.

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Tuesday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So although yesterday's drop in five-star stock EMC (NYSE:EMC) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
In November of 2006, for instance, CAPS All-Star pencils2 shared some bearish figures on Uranerz Energy:

... let's see here -- negative earnings, terrible ROA and ROE (oh, but it HAS improved the ROA and ROE from more than -500% to around -30%. Talk about impressive!), a business not producing squat, overall this is a company without anything allowing it to expand without further destroying the business.

I'll gladly take advantage of this random, nothing-behind-it (i.e. no news) 23% run-up on Friday to make this underperform call.

Not surprisingly, shares of the Canada-based uranium company are down 44% since that call.

The bearish takeaway?
Never confuse a one-day pop with a multiyear trend. As CAPS' pencils2 understands, if a company's earnings and returns on capital are lackluster, short-term run-ups can be sustained for only so long. In the words of Benjamin Graham, "In the short run, the market is a voting machine, but in the long run, it is a weighing machine."

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, 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!