Monday's Biggest Stock Stars

Hey there, Fools. I've summoned our Motley Fool CAPS community once again to highlight a few of Thursday'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 Sprint Nextel (NYSE:S). 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, 99% of the 73 All-Star members who've rated Gushan Environmental have a bullish opinion of the stock. Last month, one of those All-Stars, lawyerguy, explained why the Chinese biodiesel fuel producer was an alternative energy play worth betting on:

168M cash, 0 debt, market cap of 300M, 68M EBITDA last year. Expected to grow earnings this year and beyond. Sensitive to energy prices, but cash position gives it margin of safety.

With the help of yesterday's surge, Gushan is beating the market since 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' lawyerguy understands, if a business has a war chest full of cash, 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 Monday's biggest one-star decliners:   

While yesterday's plunge in highly-rated Buffalo Wild Wings (NASDAQ:BWLD) 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 February, for instance, CAPS All-Star elmo63 was already building a bear case against D.R. Horton:

[D.R. Horton] overbuilt in every major market during the boom years, and paid a premium for the land to boot. They will be holding these underperforming assets for several years. Construction is a brutal, cyclical business and few of today's players will survive the downturn.

Not surprisingly, shares of the Texas-based homebuilder have lost more than half of their value since that call. In fact, yesterday's tumble came after a UBS analyst lowered his earnings estimate and price target, citing continued weakness in the housing sector -- consistent with elmo63's warnings.

The bearish takeaway?
Always try to spot a company's hazardous exposures before you get beaten by them. As elmo63 knows, when things are going well, it's easy to become complacent as an investor. But that's precisely when you need to make sure management's ambitions aren't getting in the way of sustainable growth. Like Warren Buffett says, "You only find out who is swimming naked when the tide goes out."

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!