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, for instance, Krispy Kreme (NYSE: KKD). Stocks go up all the time, but unless you are able to predict the pop, what does it matter?   

Our community of more than 80,000 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 the past year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, two-time Motley Fool Stock Advisor recommendation Healthways has been a five-star stock for more than six months straight. Of course, the Tennessee-based health-care provider has returned an awesome 103% and 55% since its first and second picks, respectively, so it's easy to understand the Foolish bullishness. 

This bull pitch -- by CAPS All-Star SureBeatsWorking last June -- gives us a glimpse into our community's reasoning:

Playing to a demographic trend and providing specialized services for an unfortunate growing number of people with diabetes, heart ailments, and kidney problems and a growing population.

I held this company for a few years and watch it climb into the 50s only for it to fall right back down again! ...

This company is a long term keeper. Sit back, hope they execute as expected and watch the demographic trend play out.

Healthways is up an impressive 38% since that call.

The bullish takeaway? Whenever you "bet" on a stock, make sure you're willing to see that bet through. One of the most common mistakes investors make is not giving their investment thesis enough to time to play out. As long as your reasons for buying the stock remain intact, there should be very little reason to sell out, no matter what Mr. Market thinks.

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 while yesterday's drop in five-star stock NVIDIA (Nasdaq: NVDA) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the last year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this brief, but lesson-filled, Big Dog Holdings bear call -- by CAPS player rwadington -- nearly one year ago: "Heavily shorted stock that will continue to plummet. This stock will drop at least 25% this year (2007) ... short now."

The Santa Barbara-based retailer of lifestyle apparel is down 23% over the past year -- almost exactly as rwadington had forecast.

The bearish lesson? Always be extra cautious of stocks with a high short ratio. Although a heavily shorted stock, on its own, doesn't automatically mean a bad investment, it should at least give you pause. It is far more risky to short a stock than to go long, so when a large percentage of investors bet against your company, they often have pretty good reasons for doing so.  

The final Foolish move
Investors often focus strictly on stock price movements (or the results), 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!