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 why I selected the largest five-star gainers, as opposed to other big-name winners making noise on Monday, like low-rated retailer Finish Line (Nasdaq: FINL). Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 85,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proven its market-beating prowess: Over the last year, top-rated stocks have returned roughly 28%.

Written in the (five) stars?
For example, of 122 CAPS players who've chimed in on GeoResources, only three have a bearish opinion. Fueled by that strong Foolish support, the small-cap oil and gas producer has kept a four- or five-star rating for more than four months straight.

Less than two weeks ago, CAPS All-Star socalifjimmy explained how he stumbled across this precious GeoResource:

I like to follow "gurus" to help me with ideas. [GeoResource] was purchased by Ian Cumming of Leucadia (NYSE: LUK) in the 3rd qtr. of last year and then he upped his stake by almost 10x in the 4th qtr. at prices not much below the current price. I haven't found a better investor in my 30 years of investing and him buying it speaks volumes.

GeoResources is up 21% since that call, and has more than doubled over the last year.

The bullish takeaway?
Sometimes, it's OK to be a copycat. By closely monitoring the moves of proven money masters, you can create a powerful source of "best ideas" for your own portfolio. As long as you understand the investment case and can purchase the stock within a similar price range -- just as CAPS' socalifjimmy nicely did -- riding a respected manager's coattails can be a nice way to outsize gains.

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 although yesterday's drop in five-star stock NATCO Group (NYSE: NTG) 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?
Early last December, for instance, CAPS player glenvar touched on toxic risks within Thornburg Mortgage's portfolio:

Thornburg specialized in hybrid ARM's (adjustable rate mortgages) ... Mostly jumbos, mostly located in California ... Credit scores as low as 620 qualified for these and were considered prime ... Now the values are down 15-20% and the loans are coming up for an adjustment. It is not going to be pretty.

Shares of the New Mexico-based mortgage lender have plummeted a stunning 62% since that call. Of course, most of that loss came yesterday, after the company said a rise in margin calls from its creditors could force it out of business. And exactly as CAPS' glenvar had warned, the two sharpest thorns currently in Thornburg's side are indeed its alt-A and jumbo loan portfolios.

The bearish lesson?
Strive to understand a stock's major risk factors better than Wall Street. After all, the only shot you have of protecting yourself from toxic exposures is by identifying them before they catch most investors by surprise. Unless your analysis tells you that a given company will survive under the worst of scenarios, what may look like a bargain on paper could actually be a massive money-losing proposition.  

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!