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 low-rated DryShips (NASDAQ:DRYS). 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, 94% of the 131 All-Star members who've rated North American Palladium have a bullish opinion of the stock. In an extensive look at the company back in October, one of those Fools, TheHuney, explained why the palladium producer looked like a good bet to take. Here's an excerpt:

Right now, it’s selling at a near 60% discount to book value. ... If demand stays static for another decade (which seems somewhat unlikely to me), one might not lose that much given the value of their assets. On the other hand, if the price of palladium and/or platinum skyrockets any time within the next decade, causing the price of [North American Palladium] to spike up considerably, you just made an enormous return on your investment.

Shares of North American Palladium are beating the market by 33 points since that call.

The bullish lesson?
In investing, it's far better to keep your head down rather than up. As long as you make a conscious effort to limit your downside, market-trouncing returns usually just take care of themselves. As value guru Mohnish Pabrai once wrote, you should look for investments where the scenario is at least "heads, I win; tails, I don't lose too much."

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 stock Seagate Technology (NASDAQ:STX) 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 negative facts about Furniture Brands:

At last report the company showed negative sales growth, negative income, negative EPS, negative return on equity and negative net profit. ... it is unlikely that [Furniture Brands] will be able to increase sales and profits or improve its financials within the near future. Despite having a dividend and yield of 0.16 (1.18%), an investor would fare better finding another company with solid financials.

Not surprisingly, shares of the furniture company are down 83% since that call. In fact, yesterday's drop came after a Wall Street analyst downgraded Furniture Brands, forecasting continued share price weakness until the company actually starts to show evidence of turning around.

The bearish takeaway?
With today's market offering so many opportunities to buy quality on the cheap, there's almost no reason to mess with tiresome turnarounds. Trying to catch a falling knife can 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!