Monday's Biggest Stock Stars

We at The Fool usually don't pay attention to daily price gyrations. But some moves are just so big, investors should at least take notice -- especially when we could have seen them coming.  

The big winners   
With that in mind, I've summoned our Motley Fool CAPS community to highlight yesterday's biggest gainers among the stocks with a top rating of five stars.

Without further ado:

The reason I selected the largest five-star gainers instead of other big-name winners making noise on Monday -- such as TASER International (NASDAQ:TASR) and Staples (NASDAQ:SPLS) -- is simple. Stocks go up all the time, but unless you were able predict the pop, what does it matter?    

Our community of more than 70,000 Fools in CAPS considers its five-star stocks the most likely to outperform the market. By reverse-engineering some of the arguments made for these picks, our odds of finding the next big winner will surely improve.  

Did CAPS predict the pop?
Metalico, for example, has had more than 250 CAPS investors call "outperform" on its stock, while not a single player has gone bearish. In fact, the New Jersey-based scrap metal processor was recently ranked as the fifth-best stock in all of CAPS. When you consider CAPS is home to more than 5,100 rated stocks, I'd say a ranking like that warrants at least a closer look.

This outperform pitch -- pulled from Metalico's CAPS page -- explains some of the reasoning behind the overwhelming bullishness:  

With so many people focusing on new "green" initiatives, I think the old recycling industry has been overlooked. Recycling will become only more popular in coming years, as commodity prices continue to rise. There's a lot of room to consolidate in this fractured industry where many recycling plants are owned locally in mom-and-pop-style operations. MEA has shown that it can take advantage of these consolidation opportunities to turn a profit.

Since CAPS player cawdad made that call last July, Metalico is up 48%. Even more significant is the stock's monstrous run of 217% over the last 52 weeks.

The bullish takeaway? Oftentimes, the most potent investments lie in mundane industries that Mr. Market overlooks. As long as the "old economy" industry you're considering provides services that are an absolute necessity (railroads, pulp, steel, wallboard, etc.), boring sectors can provide some of the easiest money out there.

As Warren Buffett says, "Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count."

Now for the losers
Of course, winning isn't everything in the stock market. Stocks go down, too.   

Here are yesterday's biggest one-star decliners:   

One-star stocks inspire the least confidence from our CAPS players. So while yesterday's losses in Schering-Plough (NYSE:SGP) and Schlumberger (NYSE:SLB) may have caught shareholders a bit off-guard, our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this ACA Capital Holdings pitch by All-Star Ayax2006 in August:  

I don't normally go short, but this one is a no brainer. ACA's stock has come down a lot recently, but bankruptcy is just a matter of time. Its portfolio of [guaranteed] commercial debt obligations (CDOs) is more than 180 times larger than its capital base ($61 [billion] vs. $326 [million]). A collateral impairment of 7% spread across the pool underlying its mezzanine CDOs would be enough to [send] this firm packing. ... ACA would be on the hook for its entire $9.3 [billion] mezzanine risk exposure, i.e., game over.

The New York-based provider of credit protection products is down 47% since the call and off a depressing 71% since last November.

The bearish lesson? Bad things can (and do) happen to even the best of businesses. But as long as the balance sheet is strong, there's always a good chance of survival.

Companies with insane debt levels, though, leave virtually no margin of safety. For businesses with overleveraged -- and in ACA's case, hyper-leveraged -- capital structures, even the slightest downturn can wipe out shareholders' entire equity stake. Out of the thousands of stocks available to you, taking a chance on debt-ridden companies isn't worth the risk or the headaches.

The final Foolish move
Investors often focus strictly on stock price movements or the results 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 stocks that win and lose will help you become a more Foolish investor.

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