Monday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Monday's biggest winners among the stocks with a top rating of five stars.

Without further ado:

There's a reason why I selected notable five-star gainers, as opposed to other big-name winners making noise on Monday, like one-star home builders Centex (NYSE:CTX) and Pulte. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 120,000 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: In the first 20 months since its inception in late 2006, five-star stocks beat the market by 12 points, annualized.

Written in the (five) stars?
For example, 97% of the 361 CAPS members who've rated NRG Energy have a bullish opinion of the stock.

In February, CAPS member guesstimation explained why the New Jersey-based wholesale power generator seemed set to soar:

With rising power prices and the nation's mission to wean itself off of Middle East oil, NRG is a perfect position to capitalize. It has a very large, diverse portfolio of power plants and is looking to be leader in the development of clean coal technology, new nuclear plants, and possibly even some renewables.

Consistent with that call, shares of NRG jumped nearly 30% yesterday after nuclear power giant Exelon (NYSE:EXC) made an unsolicited $6.2 billion all-stock bid for the company.

The bullish lesson?
Always think like a business owner. All sorts of noise can depress a stock's price in the short term, but the true investor is able to focus on the factors that really count over time. By buying into companies with extremely attractive assets, and that are "perfectly positioned" to capitalize on those assets, you give yourself plenty of "upside" opportunities -- including being coveted by the big boys -- to earn an outsized return.

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

Here are five of Monday's biggest one-star decliners:   

While yesterday's drop in five-star CapitalSource (NYSE:CSE) may have caught our community off-guard, one-star stocks are fully expected to fall hard: Over the 20 months since CAPS started, one-star stocks dropped an average of 11.4%, annualized.

Did CAPS call the fall?
In April, for instance, CAPS All-Star shop1 shared some bearish musings about Brunswick:

Apparently billiards, boats and bowling aren't the best combination. ... The companies EPS, revenue and net income have been faltering for awhile now. Closing the Ohio plan is just further indication that the company is struggling. The fact that BC's stock is selling well below book doesn't appear to be attracting investors. BC will have to make some significant changes to turn this company around.

Not surprisingly, shares of the troubled boat maker are down more than 70% since that call. In fact, Brunswick's stock managed to touch a 25-year low yesterday after Moody's downgraded its debt ratings to junk status -- consistent with shop1's warnings.

The bearish takeaway?
If you plan to play the turnaround game, it's often better to wait until the business shows evidence of turning around before you decide to jump in. Trying to catch a falling knife can certainly be profitable, but you always run the risk of grabbing it at the sharpest place. As Peter Lynch once wrote, it's better to "wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it."

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!