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, like IBM (NYSE: IBM). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 81,000 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 479 CAPS players who've rated ValueClick so far, a whopping 98% of them are bullish. And of the 120 All-Star Fools who've chimed in on the California-based online-advertising company, only two have given the stock an underperform rating.      

This bull pitch -- by CAPS player cb45 just this past weekend -- touched on the significance (or lack thereof) of the Federal Trade Commission's ongoing probe into ValueClick's lead-generation practices:  

A stock that has been oversold because of the FTC probe; expect it to start soaring when it gets the FTC probe behind it. It is the largest independently owned internet advertiser that is in a business that is still untapped and largely growing. With a PEG ratio of 1.37 it will be a big winner in 2008.

ValueClick has dropped considerably since the investigation was announced last May. However, the stock surged yesterday after a Wall Street analyst upgraded the stock, pretty much echoing cb45's opinion that the probe will indeed resolve without seriously hurting the company.  

The bullish takeaway? Not all federal investigations and/or warnings are created equal. By figuring out which ones Mr. Market has completely overreacted to, you'll be one step closer to finding a genuine bargain. Of course, it takes more work to ferret out those types of opportunities, but, if predicted beforehand, favorable news regarding a federal probe can serve as a powerful price catalyst.

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 Navios Maritime Holdings (NYSE: NM) may have caught our community off guard, one-star stocks are fully expected to fall hard. Over the past year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Take, for instance, this Steak n Shake bear pitch -- by CAPS All-Star kristm -- as a reply early last May to top bear pitch by Netscribe:

The customer counts are dropping because of the focus on growth through store openings. Standards are put aside as new stores come online, but the experience is poor and customers don't come back. ... Upcoming store launches and new questionable (expensive, complicated, and non-core) menu items will just make the slide worse as the year progresses.

Shares of the Indianapolis-based restaurant operator have fallen a depressing 53% since that pitch. In fact, the stock fell to a nearly seven-year low yesterday after management said it expects to post a first-quarter loss because of, among other things, continued traffic weakness and disappointing store execution -- just as CAPS' kristm had warned.

The bearish lesson? Business growth, on its own, tells us very little about value. In a restaurant's case, new store openings benefit shareholders only when the new stores can generate attractive returns on that incremental capital. If management insists on expanding quickly -- by taking on debt and issuing shares -- at low rates of return, it's just a matter of time before the stock reflects the company's lack of economic veracity.

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!