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 -- such as LDK Solar (NYSE:LDK) -- 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 77,000 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, out of the 118 CAPS All-Stars who've rated ShengdaTech, just a single one is bearish. On the strength of the overwhelming Foolish support, the Chinese producer of nano-precipitated calcium carbonate (NPCC) has kept a five-star rating for more than two months straight.     

The top bull pitch for the company -- by CAPS All-Star Hezakiah late last June -- highlighted some cheapish ratios for our community:

Currently trades at a trailing [price-to-earnings ratio] of 15, a forward PE of less than 10 and a PEG of about 0.25. The company has $40 million in cash with no debt and has also just recently started trading on Nasdaq.

I love these Chinese companies that trade outside the Shanghai exchange. ... They carry all the positives of being in such a booming economy, yet they are invisible to the Chinese bubble and thus can be found at tremendous values.

Shegdatech is up a whopping 78% since that call.

The bullish takeaway? For the very best bargains, try to look where other investors aren't. Though it's possible to find megacap steals in plain view, your chances of treasure-hunting success increase dramatically when you stick to small caps hiding in the uncharted corners of the market. As Bill Miller says, "If it's in the newspapers, it's in the price."

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 Celgene (NASDAQ:CELG) 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 Overstock.com underperform pitch -- by CAPS All-Star lasindi -- exactly one month ago:

Overstock.com has lost money for the last couple of years, but even if it could instantly turn a profit with the same profit margin as Amazon.com (NASDAQ:AMZN), it would still have a P/E ratio of about 35. ... 35 might seem reasonable compared with Amazon's forward P/E of 49 ... but Amazon has a high P/E because of its great revenue growth: 41% quarterly. Compare that with Overstock's 2%. Overstock getting its profit margin in line with Amazon's is a very optimistic outlook, and even then it seems overvalued.

The Utah-based online retailer is already down 41% since that call. In fact, yesterday's drop came after CEO Patrick Byrne said fourth-quarter gross margins would be lower than in recent quarters, because of aggressive promotions and discounting -- in line with lasindi's realistic outlook.

The bearish lesson? Always try to have a clear idea of a stock's risk/reward profile. By working through various scenarios (worst-case, average-case, and best-case), you'll start to get a good feel for an investment's possible range of returns. If a stock's potential upside seems limited (or nonexistent) even under the rosiest of scenarios, then it's probably best to take a pass.

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!