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 Rite-Aid (NYSE:RAD). 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: Since its inception in 2006, five-star stocks are beating the market by 12%.

Written in the (five) stars?
For example, out of the 219 CAPS members who've rated Sabine Royalty Trust, 96% have a bullish opinion. Fueled by that Foolish support, the Dallas, Texas-based oil and gas trust has kept a five-star rating for just shy of six months straight.

In December 2007, CAPS member mplaut100 highlighted Sabine's income-paying features, calling the company a "solid, dividend-generating performer that should be linked to the price of oil while it pays a nice dividend."

Shares of Sabine have risen an amazing 50% since that call.

The bullish lesson?
Boring dividends don't always mean boring returns. Dividend-paying stocks are often associated with a lower-risk, lower-return investment profile, but Sabine Royalty clearly shows us what can happen if you find an income-payer with exceptionally huge tailwinds in its favor. As CAPS' mplaut100 understands, in today's manic market, a little dividend stability can go a long way toward protecting, and even growing, your portfolio. 

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 members. So although yesterday's drop in highly rated Mechel (NYSE:MTL) may have caught our community off guard, one-star stocks are fully expected to fall hard. Since CAPS started, one-star stocks have dropped an average of 11.4%.

Did CAPS call the fall?
Just last month, for instance, CAPS member Citadel7 commented on the dangers of Ambac Financial's portfolio:

This is a bond insurer that has a terrible subprime portfolio. ... $18.7 billion worth of subprime loans are sitting on [Ambac]'s books. The exposure is equal to 284.4% of statutory capital. Leverage (Face Value Bonds/Statutory Capital) is 80.8 to 1. [Ambac]'s loss of AAA status in the debt markets deprives it of the ability to raise funds competitively, which means it will soon starve to death.

Consistent with that call, shares of Ambac plunged yet again yesterday on fears that its municipal bond unit won't be able to receive a top credit rating, and would likely struggle to sell new policies.

The bearish takeaway?
There's really no substitute for knowing a business model cold. As CAPS' Citadel7 understands, by understanding exactly how a company works and how it's positioned financially, you'll have a greater ability to see looming problems that other investors can't. Like Warren Buffett says, "Risk comes from not knowing what you're doing."

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!