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 top ratings of four or five stars:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Monday, such as low-rated Sprint Nextel (NYSE:S): Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 140,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 96.8% of the 607 All-Star members who've rated American Capital have a bullish opinion of the stock. Just two weeks ago, one of those top Fools, JMJeffrey, explained why the asset manager seemed like an asset worth owning:

The question is will they survive? If yes, then these prices are low enough for long term success. Because of the lack of cheery consensus the market is giving us an opportunity. I believe that from here they will survive [and] outperform the market in the long term.

Consistent with that call, shares of American Capital surged by more than 15% yesterday after realizing a total gain of $17 million on the sale of one of its portfolio holdings.

The bullish lesson?
The most important job you have as an investor is to quantify a stock's upside and downside. At the very least, you should always make sure you're being compensated appropriately for all the risks you're taking on. If a stock's potential payoff seems generous compared to the chance of loss -- as JMJeffrey surmised with American Capital -- it's probably best to take Mr. Market up on his offer.

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

Here are five of Monday's biggest decliners with one- or two-star ratings:   

While yesterday's drop in highly rated miner Coeur d'Alene Mines may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Late last month, for instance, CAPS All-Star leohaas couldn't quite understand Vonage's recent surge:

Why did this stock go from 60 cents to $1.60 in one day? They announced that they will now give away calling internationally for free. No doubt this ploy will attract new customers. But at $25 a month, where is the profit if these people start calling? Last time I checked, international termination rates were still in the penny a minute range.

Following yesterday's drop, shares of the Internet phone company have already fallen 36% since that call.

The bearish takeaway?
Never confuse an improving price for improving prospects. As long as a company's financial situation continues to look bleak, short-term, emotionally charged run-ups can continue for only so long. As Warren Buffett reminds us: "For some reason, people take their cues from price action rather than from values. ... The dumbest reason in the world to buy a stock is because it's going up."

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 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!