Monday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again 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, as opposed to other big-name winners making noise on Monday -- like Marvell Technology (NASDAQ:MRVL) and Juniper Networks -- is simple. Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our CAPS community of more than 71,000 Fools considers its five-star stocks the most likely to outperform the market. By reverse-engineering the arguments made for these picks, we improve our odds of finding the next big winner.

Was it written in the (five) stars?
Longtime favorite BluePhoenix Solutions, for example, has had a whopping 161 All-Stars give it an outperform rating (with zero bears). It's no surprise, then, that the Israeli IT company has maintained a perfect five-star rating for the past six months.

This outperform pitch -- written by CAPS player jzlthssw on Aug. 1 -- touched on BluePhoenix's analyst-topping tendencies:

This company has beaten Street consensus 10 quarters in a row. We have come to expect the company to always under-promise and over-deliver. No exception this time (7/31-$0.16 vs. $0.13) and was beaten down for "not beating enough." Crazy! $1/share by '08 easily and multiple can expand to 20x in no time due to its fast growth.

BluePhoenix is up 80% since that call just three months ago, and has delivered an unbelievable 299% return year over year. In fact, yesterday's 13% pop came after the company beat analyst estimates yet again, reporting third-quarter non-GAAP earnings growth of 50%.

The bullish takeaway? Pay attention to companies that make a consistent habit of beating Wall Street's profit targets. Although we don't exactly advocate a momentum-based approach, climbing onto a stock with streaking earnings growth, and, better still, greater-than-expected growth, can be an effective way to snag those multibagger gains.

As Warren Buffett simply says, "Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value."

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

Here are yesterday's biggest one-star decliners:  

One-star stocks inspire the least confidence from our CAPS players. So while Monday's big drops in Office Depot and FEMSA (NYSE:FMX) may have caught shareholders off-guard, our community fully expects one-star stocks to fall -- and fall hard.

Did CAPS call the fall?
Take, for instance, this Progressive Gaming underperform pitch by CAPS All-Star pencils2 back in May:

Earnings, which have already been negative, are taking a freefall. Sales are falling steadily as well.

PGIC produces negative cash flow, relies on issuing debt for cash, which is pretty obvious considering they've racked up $18 million more in debt over the past year.

Terrible margins that are continuing to worsen, profit margin is now at -60.73%.

This is an awful company and the stock is a hunk of junk. The company has only managed to turn a profit once over the past six years, and I doubt they'll be reporting positive numbers anytime soon, if ever. A market cap of $179 million is way, way too high for PGIC.

The Las Vegas-based provider of casino management software is down more than 13% since that call, and off a bank-breaking 49% year over year. Yesterday's massive price drop, in fact, came following an analyst downgrade after a disappointing legal ruling against the company, prompting management to post a $20 million bond to begin the appeal process.

The bearish lesson? Companies that pile up massive losses (and debt) are something we should stay far away from. Turnarounds do occur, but they generally happen when a good company bounces back from a one-time anomaly. Holding onto companies with a long history of wealth destruction is almost a sure way to underperform.

The final Foolish move
Investors often focus strictly on stock price movements (or the results), without realizing that developing a proper stock-picking process is what counts most.

Over at Motley Fool CAPS, more than 71,000 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!