Tuesday's Biggest Stock Stars

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

Without further ado:

Company	Yesterday's % Gain
UnitedHealth Group (NYSE: UNH  )	20.90%
Apollo Investment (Nasdaq: AINV  )	20.84%
Allied Irish Banks (NYSE: AIB  )	17.85%
Sadia	17.27%
Vale	14.67%

There's a reason I selected notable five-star gainers, as opposed to other big-name winners making noise on Tuesday, like low-rated financials Wachovia (NYSE: WB  ) and Citigroup: Stocks go up all the time, but unless you were able to predict the pop, what does it matter?  

Our community of more than 115,000 CAPS Fools considers its five-star stocks the most likely to outperform the market. And so far, CAPS has indeed proved its market-beating prowess: Since its inception in 2006, five-star stocks are beating the market by 12 points, annualized.

Written in the (five) stars?
For example, 99% of the 254 CAPS All-Stars who've rated Income Investor pick Apollo Investment have a bullish opinion of the stock.

In April, CAPS All-Star milkybarz3 highlighted the business-development company's (BDC) cash-generating qualities:

Amazing dividend (around 13% currently), and basically immune to any change in the dividend tax rate, [because of] this divvy already being mostly unqualified anyway. A conservative BDC play, trading well under [net asset value] currently. Invest and enjoy the huge dividend, and when the share price climbs back above NAV, be prepared to really rake in the $$.

With the help of yesterday's 20% pop, Apollo is beating the market since that call.

The bullish lesson?
Boring dividend-payers don't always mean boring returns. In fact, buying into financially strong, well-positioned dividend stocks is one of the more reliable ways to trounce the market ... and with a lot less volatility, too. As CAPS' milkybarz3 understands, in today's manic market, a little dividend stability can go a long way toward protecting your portfolio. 

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

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

Company	Yesterday's % Loss
Pacific Ethanol	33.17%
Circuit City Stores (NYSE: CC  )	29.63%
VeraSun Energy (NYSE: VSE  )	21.75%
Valence Technology	19.77%
Wendy's International	10.85%

While yesterday's drop in highly rated Gushan Environmental (NYSE: GU  ) may have caught our community off guard, one-star stocks are fully expected to fall hard: Since CAPS started, one-star stocks have dropped an average of 11.4%, annualized.

Did CAPS call the fall?
Two weeks ago, for instance, CAPS All-Star floridabuilder shared some bearish facts about Circuit City Stores: "trading at 0.23 of book ... payables offset inventory leaving only PP&E ... however, bleeding cash for many more moons ... they need to go bankrupt and restructure."

Consistent with that call, shares of Circuit City plunged yesterday after the stock got a downgrade. A Wall Street analyst cited the electronics retailer's probable need for creditor protection if results continue to deteriorate.

The bearish takeaway?
Always follow the cash flow. Investing, after all, is about putting money up front today so you can get more of it in return tomorrow. As floridabuilder understands, if a company bleeds cash and, worse yet, has few prospects for future cash-flow production, chances are you won't see a return of your capital, much less a return on your capital.

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! 

On Oct. 7, 2008, Fool Co-Founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.