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:

Company

Yesterday's % Gain

Stewart Enterprises (Nasdaq: STEI  )

17.74%

Graham (AMEX: GHM  )

9.97%

Silver Standard Resources (Nasdaq: SSRI  )

8.35%

Anooraq Resources

8.26%

Denison Mines

7.87%

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 one-star homebuilders Pulte Homes (NYSE: PHM  ) and Hovnanian. 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 proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 33 CAPS All-Stars who've rated Stewart Enterprises, just three have a bearish opinion. Fueled by that growing Foolish support, the small-cap provider of funeral services has kept a four- or five-star rating for more than six months straight.

Less than a month ago, CAPS member kenwen2008 touched on the trends working in Stewart's favor:

As the baby-boomers begin to approach "nursing home age", we should be seeing quite a bit of estate planning, including planning for medicaid eligibility. Pre-need funeral arrangements are a great way to reduce countable assets for medicaid eligibility, which leaves this company in a strong position for the long term. Look for this industry to consistently grow and do well for years to come.

Consistent with that call, shares of Stewart surged yesterday after competitor Service Corp. (NYSE: SCI  ) revealed that its $881.7 billion buyout offer was rejected -- a proposal that Stewart's board of directors called "inadequate."

The bullish lesson?
Let the (demographic) trends be your friend. By identifying excellent companies positioned to capitalize on powerful demographic tailwinds -- just like CAPS' kenwen2008 demonstrated -- you'll always have massive market-trouncing forces working in your portfolio's favor. As my Foolish colleague Todd Wenning recently wrote, "Rather than speculating on events that may or may not happen, I offer you one trend that's sure to happen -- the aging of the baby boomer generation."

And now for the losers ...
Of course, winning isn't everything in the stock market.

Here are Monday's biggest one-star decliners:  

Company

Yesterday's % Loss

Washington Mutual (NYSE: WM  )

34.75%

Sterling Financial

28.73%

First Horizon National

24.78%

Zions Bancorp

23.20%

AirTran Holdings

18.82%

One-star stocks inspire the least confidence from our CAPS members. So although yesterday's drop in five-star stock Waste Management (NYSE: WMI  ) 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?
Just three weeks ago, for instance, CAPS All-Star JDSancho made this rather prescient prediction on Washington Mutual:

My underperform pick rests on the fact that WM already knows there will be more write-downs in the future. They can announce that fact now, but when the write-downs hit the headlines in the future, investors will bail, regardless! That's just how the market is. There will be continuous pressure on this stock, as well as other S&Ls for a long time.

Consistent with that call, shares of Washington Mutual plunged yesterday after a Wall Street analyst said that the savings and loan giant could face billions of dollars more in losses, forcing it to add "substantially to reserves."

The bearish takeaway?
Just because a stock has plummeted in price, that doesn't mean it's safe. As CAPS' JDSancho understands, there's really no telling how low a stock can go when it's subject to both extreme fundamental and "headline risk." Unless you're reasonably confident that you're right, and more importantly, are willing to take an extra-long time frame, buying into high-profile distressed situations isn't worth all the stress.

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!

Waste Management is an Inside Value recommendation. First Horizon is a former Income Investor pick. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. The Fool's disclosure policy is always the big winner.


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