Monday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Monday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Monday, like one-star home builders Lennar (NYSE:LEN) 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 125,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97.6% of the 5,292 members who've rated Freeport-McMoRan have a bullish opinion of the stock. Late last month, one of those Fools, KipLargo, explained why the mining giant was being unreasonably beaten down:

Certainly its exposure to copper hurts, and they probably wish that copper wasn't in their name because they get associated as an infrastructure play rather than a precious metals play. I think they are more than discounted because of this association, and the current price of copper is more than baked into the price.

Consistent with that call, shares of Freeport surged yesterday after the company posted a fourth-quarter loss of $13.9 billion on writedowns related to copper prices and still managed to top Wall Street's estimates on operating earnings.

The bullish lesson?
Always be on the hunt for stocks priced for imperfection. It's virtually impossible to call "bottom" on a stock, but if you're confident that the risks are already factored into the price, there's a good chance your investment will turn out well over time. As legendary value investor Sir John Templeton famously said, "The time of maximum pessimism is the best time to buy."

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

Here are five of Monday's biggest one-star decliners:   

While yesterday's drop in five-star stock Dow Chemical (NYSE:DOW) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Last month, for instance, CAPS All-Star goofyfool made this bearish prediction about PrivateBancorp: "Horrid fundamentals, losing cash rapidly. Once the commercial real estate loan bleeding hits the books, there's nowhere to go but down."

Shares of the Chicago-based bank are already down 49% since that call. In fact, yesterday's plunge came after the company's quarterly loss widened to $62.2 million on rising mortgage-related provisions and charge-offs -- just as goofyfool had warned.

The bearish takeaway?
Never confuse a resilient price for a resistant business. As long as a company's underlying economics continue to deteriorate, it's only a matter of time before the stock price starts to reflect it. By doing your own homework and ignoring Mr. Market's current opinion, as goofyfool demonstrates, you give yourself a better chance of coming to a more realistic view of a company's risk/reward profile.

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!