Monday's Biggest Stock Stars

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

Without further ado:

There's a simple reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Monday, such as low-rated Washington Mutual (NYSE:WM): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 95,000 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: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 157 CAPS All-Stars who've rated North American Palladium, 97% have a bullish opinion. Fueled by that top-notch support, the Canadian palladium producer has kept a four- or five-star rating for over six months straight.

Late last December, CAPS player alcornmj taught our community how to play with palladium:

In the long-term, mining palladium ought to remain profitable as it is relatively scarce. ...

As noted, palladium is used in catalytic converters. It is being researched as a safe method of storing hydrogen for fuel cell vehicles, since it is capable of absorbing up to 900 times its own volume of hydrogen, safely storing it within the metal's matrix. It is also necessary in solid-state fusion cells.

So, short-term I think a rebound is in order. A 50% retracement of recent losses would put it in the $6-$7 dollar range.

North American Palladium is already up 79% since that call and closed yesterday's trading at $6.50 -- exactly as alcronmj had predicted all along.

The bullish takeaway?
Don't start running on commodities just yet. Despite Mr. Market's recent short-term correction, commodities can provide a great way to hedge against the serious long-run risks of inflation. As my Foolish colleague Dan Caplinger wrote recently, "With the world's appetite for raw materials continuing to expand, don't be surprised to see commodities hit new highs again in the near future."

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

Here are Monday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So although yesterday's drop from highly rated Novartis (NYSE:NVS) 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?
Late last January, for instance, CAPS player zzlangerhans warned of the viruses lurking within Pharmasset's valuation:  

As predicted the price bumped with positive phase I data for hepatitis C drug R7128. However, there has been a strong over-reaction given that this is Phase I data and the stock is now very overpriced. ... I think the price will trail down in the short term as reality sinks in, and later on a true decline may occur with negative news on R7128.

Shares of the clinical-stage pharmaceutical company have plunged 31% since that call and are down more than 50% from the 52-week high they set in mid-January.  

The bearish lesson?
Without a proven track record of success, all you're paying for is potential. Even worse is if the stock price already reflects that promise: You probably won't get compensated well enough -- if at all -- for the massive risks involved. After all, when a stock is priced for perfection, even perfection won't be enough to earn an outsized return.

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!