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 Crocs (NASDAQ:CROX). 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 proved 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 1,471 CAPS members who've rated VAALCO Energy have a bullish opinion of the oil and gas stock. Late last week, one of those Fools, DaretothREdux, explained why the small-cap company looked good for the long haul:

I am a long term bull on this one because they have practically zero debt and low operating cost. The P/E fits the growth potential and oil is going back up in the long run before we stop using it.

With the help of yesterday's pop, DaretothREdux is off to a nice start with that call.

The bullish lesson?
Cash walks; everything else talks. Especially in today's credit-crunched environment, companies with no debt, comfy cash cushions, and attractive growth prospects should always be at the top of any buy list. As CAPS' DaretothREdux understands, if a business has a war chest full of cash (and little debt), management at least has the opportunity to take shareholder-friendly actions like buying back stock, growing the business organically, or paying dynasty-building dividends.

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

Here are five of the biggest one-star decliners from yesterday:  

While yesterday's plunge in highly rated Excel Maritime Carriers (NYSE:EXM) 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 August, for instance, CAPS All-Star drakitin shared some bearish thoughts on EMCORE:

Concentrated GaAs [gallium arsenide], although more efficient, is very far away from large-scale production. Even when all the quirks are worked out, i would think the technology will be licensed/adopted by a larger player in solar. I do not see an upstart like [EMCORE] being the ONE to bring this to market.

Shares of the solar chip maker are down 75% since that call.

The bearish takeaway?
Always be aware of the case against small caps. Tiny companies have the most room to rocket, but because of their limited capital and resource base, big companies entering the space can often just squish them into the ground. By ensuring that your smaller stocks are genuine top-dog first movers, inexpensively priced, and fill a niche that's not being fought over by multibillion-dollar gorillas, you'll be well-protected from most small-cap flops.

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!