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 Monday, like one-star stock Blockbuster (NYSE: BBI). Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 86,000 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, of the 200 CAPS players who've rated Tongjitang Chinese Medicines, a whopping 98% are bullish. Early in January, I even featured the traditional Chinese-medicine company as an interesting low-priced opportunity.

In this outperform pitch from last October, CAPS All-Star NeroSagetrade elaborates on the bargain:

If these estimates are correct, then Tongjitang Medicines might be the least expensive company I have just about ever seen. Analyst consensus estimates show $7 in EPS in 2008 and $9.11 in 2009 ... Why oh why would I ever not recommend buying when I'm seeing these figures?

As if to echo that sentiment, yesterday's 32% gain came after chairman of the board Xiaochun Wang and CEO Yongcun Chen proposed to take Tongjitang private, offering shareholders $2.55 in cash for each outstanding share of the company ($10.20 per American depositary share).

The bullish takeaway?
Always have the mindset of a business owner. As NeroSagetrade and Tongjitang's insiders clearly understand, if you pay a bargain price for a business and the business itself does well, you really don't need Mr. Market's help. In Warren Buffett's words, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

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 players. So although yesterday's drop in five-star stock Ceragon Networks (Nasdaq: CRNT) may have caught our community off-guard, one-star stocks are fully expected to fall hard. In the first year, CAPS' lowest-rated stocks dropped an average of 16.6%.

Did CAPS call the fall?
Late last August, for instance, CAPS player inister painted a bearish picture for Thornburg Mortgage: "Credit crunch has severely impaired TMA's operations. TMA's bonds are rated junk giving an indication of the company's precarious position with BK a very possible outcome."

Not surprisingly, shares of the troubled lender plunged yesterday (yes, again) after a Wall Street analyst downgraded the stock a second time after warning investors of a possible bankruptcy -- just as inister had cautioned Fools months ago.

The bearish lesson?
Always assess a company's bankruptcy risk before it comes back to bite you. Unless you're absolutely certain that the valuation properly compensates for such risks, it's probably best to move on. With highly leveraged companies, you should always be prepared to lose 100% of your investment ... so make sure it's worth it.

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, tens of 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!