Monday's Biggest Stock Stars

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

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Monday, like one-star automakers General Motors (NYSE:GM) and Ford. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 95% of the 401 CAPS All-Stars who've rated Motley Fool Rule Breakers pick NYSE Euronext have a bullish opinion of the stock.

In August, CAPS All-Star SmokeyJoeSmokin explained why the venerable stock exchange operator was a good bet to bounce back: "Here's a case of the baby being thrown out with the financial bathwater IMO. Decent dividend, cheap valuation, and a financial bellweather make this a good buy in my book."

With the help of yesterday's massive 30% surge, NYSE Euronext is beating the market since that call.

The bullish lesson?
Let the market be your servant. Not your guide. One of the biggest mistakes investors make is confusing a stock's price action with the company's underlying fundamentals, and failing to capitalize when there's a big spread between the two. As Benjamin Graham, the father of value investing, once wrote, "Look at fluctuations as your friend, rather than your enemy -- profit from folly rather than participate in it."  

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

Here are five of Monday's biggest one-star decliners:  

While yesterday's drop in highly rated Barrick Gold (NYSE:ABX) may have caught our community off guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In March, for instance, CAPS member InvestmentBiker2 shared some bearish thoughts on American Axle:

[American Axle] is a major supplier to GM, and you have seen where the U.S. auto market is headed. GM has been struggling to sell it big trucks and SUVs, and [American Axle] makes parts for these types of vehicles. As the U.S. slides into a recession, you will see [American Axle] sales and profits sink...along with it's stock price.

Not surprisingly, shares of the auto supplier, which relies on GM for 75% of its revenue, are down a whopping 87% since that call. In fact, yesterday's plunge came after GM announced that it would indeed close its oldest and largest plant in December due to the continued weakness of the SUV market -- exactly as InvestmentBiker2 had warned.

The bearish takeaway?
Never underestimate the importance of customer diversification. If a company derives a large chunk of its revenue from just a few large, key customers, then your risk is also concentrated on just a few large, key customers. Of course, when business is booming, having a diversified customer base might seem trivial, but as American Axle demonstrates, any material troubles with key clients can spell doom in a hurry.

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, tens of 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!

In the coming weeks, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. The service, which just launched, will rely heavily on proprietary CAPS "community intelligence" data to establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds (ETFs). To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.