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, such as one-star financial The Bear Stearns Companies (NYSE: BSC): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 92,000 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 its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 962 CAPS players who've rated Motley Fool Stock Advisor selection InterDigital, 97% have a bullish opinion. Fueled by that massive Foolish support, the wireless-technology developer has maintained a four- or five-star rating for more than six months straight.

At the start of the month, CAPS player mingvest64 offered the following take on the company's ongoing patent disputes: "Beginning to dislike companies embroiled in litigation but this one has the promise, at least, of resolution on the horizon. If the ITC [International Trade Commission] back them we will either see capitulation by Nokia (NYSE: NOK) and Samsung or a long drawn out court battle of appeals and countersuits."

InterDigital is already up 32% since that call. Nearly half of those gains came yesterday, after the company said it was indeed in talks with Nokia to settle the patent litigation -- consistent with mingvest's prediction.

The bullish takeaway?
Always be on the hunt for powerful price catalysts. Finding an undervalued stock is great, but without looming catalysts that can unlock that hidden value, you may have to sit on your bargain for longer than you'd like. When your profit opportunity depends on the occurrence of a specific event, rather than simply on the general market environment, you'll have a good chance to make money no matter how long Mr. Market stays depressed.    

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 highly rated Visa (NYSE: V) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Back in May 2007, for instance, CAPS All-Star JMacAttack shared these bearish beliefs about Cambrex:   

[T]hey are reporting that Q3 will be "soft" and they "think" that Q4 will be stronger, but they don't know how product mix and customer progress will affect their earnings. Who's the captain of this ship? Do they really know what's happening with their business?

$12/share at a [price-to-earnings ratio] of 20 would require $0.60/share of earning. Will they have that kind of earnings potential going forward? Doubt it.

Not surprisingly, shares of the pharmaceutical-ingredients maker have fallen more than 40% since that call. In fact, the stock hit an all-time low yesterday -- a drop that was in line with JMacAttack's bearish take -- after a product using one of the company's ingredients was pulled off the market.

The bearish lesson?
Learn to manage your expectations. Embedded in a stock's price are very specific risk and earnings assumptions, so it's your job as an investor to question whether those assumptions are justified. As JMacAttack demonstrated, when even the management team's competence level and execution skills don't exactly jibe with a lofty stock price, it's best to stay skeptical.

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, 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!