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, like low-rated casino stocks Wynn and Las Vegas Sands (NYSE:LVS). Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98% of the 892 All-Star members who've rated Allied Irish Banks have a bullish opinion of the stock. Late last month, one of those top Fools, jamespeer, explained why Irish eyes would eventually start smiling:

"Invest at the time of maximum pessimism" -- things can't really get much worse in Ireland, this bank will not be allowed to fail. I can't see much downside risk if you're buying in the $3 region. This long-term buy and hold will most certainly hit double figures in 5 years if not less.

Following yesterday's massive surge, jamespeer is off to a strong start with that bullish call.

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 the risks you're taking on. If a stock's potential payoff seems generous compared to the chance of loss -- as jamespeer surmised with AIB -- 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 Novartis (NYSE:NVS) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Less than two months ago, for instance, CAPS All-Star mrindependent thought that AnnTaylor's stock price was looking worn out:

The first thing I notice about AnnTaylor is that 1.9X book seems expensive considering it is definitely not a growth company. ... Even before its 80% loss year, ROE was unimpressive -- averaging about 10.... After subtracting the $3.00 cash from the share price, you get an adjusted price of $11. This is 31 TIMES expected earning for FY ended 01/2011.

Consistent with that warning, shares of the women's apparel retailer sank yesterday after a Wall Street analyst downgraded the stock on a forecast of increased cost pressures in the second half of the year.

The bearish takeaway?
Implicit in a stock's price are very specific growth and risk assumptions. Therefore, it's your job as an investor to assess whether those assumptions are reasonable, given the company's competitive outlook going forward. As Warren Buffett reminds us, "Investors making purchases in an overheated [stock] need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

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 retire wealthy.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!