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:

The reason I selected the largest five-star gainers, as opposed to other big-name winners making noise on Monday -- like solar stocks Solarfun Power (NASDAQ:SOLF) and LDK Solar -- is simple: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 76,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its predictive prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, shares of two-time Motley Fool Stock Advisor selection Activision surged yesterday after the company announced its intention to merge with Vivendi's Blizzard Entertainment gaming unit in a deal worth about $18.9 billion. Of course, Activision has been a top-rated CAPS stock for quite some time, so our Foolish community knows all about the potential that Vivendi sees in Activision's wildly popular Guitar Hero, Call of Duty, and various other franchises. 

This bull pitch -- by All-Star Gibybo -- reflects much of Wall Street's positive reaction to the industry-shaking deal:

Activision and Blizzard together make the strongest gaming power house in the world, by a huge margin. Both companies (though Blizzard especially) have set out to revolutionize the way the world sees video games and both have experienced tremendous growth as a result. ...

This industry is still quite small (I know plenty that would disagree; they're wrong), and Blizzard is far and away the most positioned to capitalize on it just as it has in the past. Activision is a bit behind, but it's much closer than anyone else. Combined, they are absolutely untouchable.

The bullish takeaway? Massive mergers don't always make sense, but when they do, the results can be exciting. Some of the good reasons for a merger include gained economies of scale, use of complementary resources, and the elimination of operating inefficiencies. So if you ever find a deal with all of the above -- creating the kind of 800-pound gorilla that Activision Blizzard looks like it will be -- there's plenty of reason to get bullish.

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 Monday's drop in four-star stock China Unicom (NYSE:CHU) may have caught some Fools 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 Fleetwood Enterprises underperform pitch -- by CAPS player mainlinetramp -- last September:

FLE makes good products; RV's & manufactured homes. But in this "Perfect Storm" scenario, i.e., Economy = down or at least many worried it'll turn south, AND discretionary spending LOW, the RV side of business is stalled. 20% downturn in RV sales current year.

Manufactured home side has strong competition & history shows FLE is not best of breed in manufactured home niche.

The California-based provider of recreational vehicles is down a depressing 45% since that call.

The bearish lesson? Sometimes we can get away with investing in second-rate businesses, but when times are tough, it's crucial to stick only with the best. The key to Dumpster diving is buying into best-of-breed companies that actually stand to benefit from an industry shakeout (by growing market share at the expense of weaker competitors). Remember: When searching for value in distressed industries, "good" is almost never enough.

The Foolish final 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!