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 I selected the largest five-star gainers, as opposed to other big-name winners making noise on Monday, like low-rated Yahoo! (NASDAQ:YHOO). 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, of the 226 CAPS All-Stars who've rated Flowserve, just five have a bearish opinion. Fueled by that Foolish support, the Texas-based provider of flow control systems has kept a perfect five-star rating for nearly five months straight.

Less than a month ago, CAPS player LEGMAKER explained why Fools should be pumped about Flowserve's prospects:

Their pumps, valves and other systems are used in some of the fastest growing industries in the world, not only that, they are also in a constant need of repair because of their aging systems. ... Industries they serve are oil and gas, power generation, water resources and chemical engineering. ... Over the last year the only moving average this company has had is straight up. It looks as though this will continue.

Consistent with that call, shares of Flowserve popped yesterday after a Wall Street analyst upgraded the stock on a "compelling" valuation, as well as an expectation for strong sales, earnings, and margin expansion through 2010.

The bullish lesson?
There's no substitute for knowing a business model cold. As CAPS' LEGMAKER understands, the only way to reasonably predict a company's fortunes is to understand how each of its segments interacts with various industry and economic variables. In the words of Warren Buffett, "Equity Investment Strategy = Evaluate the Business in Its Entirety."

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 Teva Pharmaceutical Industries (NASDAQ:TEVA) 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?
Just a few weeks ago, for instance, CAPS All-Star jgseattle warned of the many dangers Fannie Mae investors still face:

The next leg of the mortgage issues is starting. Inflation leading to higher interest rates, leading to more defaults, leading to more negative equity housing, leading to a lot of write downs. We are not done and [Fannie Mae] is down a lot but has a long ways to go. When you hear the dividend is not safe, soon, when you hear it having to raise capital, soon, when you hear of "rescue" by taxpayers this may be at the bottom. But not now.

In line with that call, shares of both Fannie Mae and Freddie Mac plunged yesterday on concerns that the mortgage lending cousins may be forced to raise more capital as the subprime crisis persists.

The bearish takeaway?
Like CAPS' jgseattle demonstrated, pay attention to risk and effect in its totality. One of the biggest mistakes we make as investors is failing to consider second, third, and higher-order effects when analyzing a company's risk exposures. As Charlie Munger once wrote, "This defect is quite understandable, because the consequences have consequences, and the consequences of the consequences have consequences, and so on."

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, tens of 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 into CAPS today and start participating. It's absolutely free and a lot of fun!