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 satellite radio stocks XM and Sirius (NASDAQ:SIRI). 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 proven its market-beating prowess: Over its first year, top-rated stocks returned roughly 28%.

Written in the (five) stars?
For example, out of the 549 CAPS All-Stars who've rated Genentech, 96% have picked the stock to outperform. Fueled by that Foolish support, the California-based biotech behemoth has maintained a four- or five-star rating for over six months straight.

Just one month ago, CAPS member PDTBiotech showed our community how to read the DNA. Here's an excerpt:

While there's an argument to be made that they too use the blockbuster model (few drugs, huge sales/drug), if you look closely, their development style is much more deliberate than the frantic style of big pharma, and the input from the scientists has paid off handsomely, as Genentech's productivity smokes big pharma any way you care to measure it. [It] is currently carrying a somewhat higher P/E ratio than most of big pharma ... but I think the premium is warranted.

Consistent with that call, shares of Genentech surged yesterday after its Swiss partner, pharmaceutical giant Roche, offered to acquire the rest of the company's outstanding shares for $43.7 billion in cash. 

The bullish lesson?
There's just no substitute for knowing an industry cold. Unless you understand what makes each company within a given sector different, it will always be difficult to know when you're truly getting a good (or bad) deal. As CAPS' PDTBiotech understands, paying a premium for companies can work out great as long as they're premium companies to begin with.

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 drug stocks Schering-Plough and Merck (NYSE:MRK). In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Less than three months ago, for instance, CAPS member spincus614 highlighted ArthroCare's many legal problems:

Several large insurance companies are going after the medical providers and attorneys who do business with Arthrocare/Discocare. Insurance fraud seems just the tip of the iceberg. ...

There are ... [several] suits pending in Florida alone against Arthrocare related to false financial statements resulting from alleged fraudulent "upcoding" Discocare's billings. As more and more information is revealed in court filings, this company's stock will go nowhere but down. It is only a matter of time.

In line with that bear call, shares of Arthrocare plunged over 40% yesterday after the surgical products maker said it needed to restate its financials. The cause? Faulty calculations used to report sales generated from its Discocare relationship -- exactly as CAPS' spincus614 had warned.

The bearish takeaway?
Learn about a company's legal battles before they come back to bite you. By carefully examining a company's footnotes, you can find interesting clues about lawsuits that could seriously hurt its business. As CAPS' spincus614 understands, if those legal torpedoes actually hold weight, it's only a matter of time before the stock gets sunk.

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!