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 low-rated satellite stocks Sirius Satellite Radio (NASDAQ:SIRI) and XM Satellite Radio: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?   

Our community of more than 110,000 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 927 CAPS All-Stars who've rated Bolt Technology, 99% have a bullish opinion. Fueled by that Foolish support, the small-cap developer of seismic equipment for the oil and gas industry has been a five-star stock for the past four months straight.

Less than two months ago, CAPS All-Star NCJensen highlighted the bargain opportunity that Bolt shares were offering:

BOLT just got nailed after it announced its Q3 earnings (which, by the way, were spectacular). The fundamentals on this stock are absurd.
-- High earnings growth
-- Sizable insider holdings
-- Over 30% [operating] Profit
-- Over 25% [return on equity]
-- Strong cash flow
-- Etc.

Bolt Technology stock has risen by a tidy 16% since that call.

The bullish lesson?
Always remain patient and let the market come to you. As CAPS player NCJensen demonstrates, generating outsized returns is as simple as pouncing only on the rare occasions when Mr. Market is being completely "absurd." As Warren Buffett once said, "As far as I am concerned, the stock market doesn't exist. It is only there as a reference to see if anybody is offering to do anything foolish." (Small "f," of course.)

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 Frontier Oil (NYSE:FTO) 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 by an average of 16.6%.

Did CAPS call the fall?
Back in January 2007, for instance, CAPS player wluedu picked on the corny problems at Pilgrim's Pride:

Corn prices, which occupy a third of [Pilgrim's Pride's] total cost of sales, are currently at a 10 year high. ... The USDA predicts ethanol production to reach 7 Billion gallons by 2010. As the demand for corn has skyrocketed, so has its price -- and even Pilgrim's Pride has admitted that with raising corn prices chicken prices will have to increase as well in 2007 and beyond.

Shares of the Texas-based poultry producer are down 44% since that call. In fact, yesterday's drop came after a Wall Street analyst downgraded the stock on concerns of flat chicken prices and rising feed costs caused by the surging price of corn -- exactly as CAPS' wluedu had warned all along.

The bearish takeaway?
You should seriously consider modeling ... financial modeling, that is. Discounted in a stock's price are very specific revenue and cost assumptions, so being able to model those factors under various scenarios -- whether on a spreadsheet or piece of paper -- can give you a better idea of what the business is really worth. Consciously thinking through these issues might seem tedious, but as CAPS' wluedu demonstrated, doing so prevents portfolio pain in the long run.

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!