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 top ratings of four or five stars:

There's a reason I selected those notable gainers, as opposed to other winners making noise on Tuesday, like one-star homebuilders Beazer and D.R. Horton. Stocks go up all the time, but unless you were able to predict the pop, what does it matter?

Our community of more than 145,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 98.2% of the 343 All-Star members who've rated Emerson Electric have a bullish opinion of the stock. This past Monday, one of those top Fools, pl2358, tapped the stock as a particularly timely income opportunity:

[Emerson] is a well-run company with plenty of upside to earnings. The company has leaned itself out, making smart moves regarding taking on debt and streamlining activities. [Emerson] is a Dividend Aristocrat, which will make it popular with dividend investors. Because the company has great management and is set up with cash to make strategic acquisitions to improve the company, [Emerson] has a much brighter future than the overall S&P 500.

Consistent with that call, shares of the electrical products maker surged yesterday after posting better-than-expected quarterly results and issuing full-year guidance that was also ahead of analyst estimates.

The bullish lesson?
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 CAPS' pl2358 understands, if a company consistently generates healthy 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 Tuesday's biggest decliners with one- or two-star ratings:

While yesterday's drop in highly rated energy stocks Suncor and BP (NYSE:BP) may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
Late last year, for instance, CAPS All-Star MoneyWorksforMe thought that the American Superconductor bear case all boiled down to price. Here's an excerpt:

I still love the [American Superconductor's] prospects, however I fear a bit for the stock in the shortterm. The stock is enjoying investor euphoria at the moment, which effectively scares me. ... With expectations so high, it makes it extremely difficult for the stock to ultimately outperform. For if even earnings are good, or modestly better than expectations that may NOT be enough to encourage such a high p/e multiple going forward.

In line with that warning, shares of the electrical systems specialist plunged yesterday after a disappointing fourth-quarter outlook overshadowed an otherwise strong third quarter in which revenues nearly doubled.

The bearish takeaway?
Never mistake an attractive business for an attractive stock. As CAPS' MoneyWorksforMe understands, even the fastest-growing company can disappoint Mr. Market if its valuation already reflects much of that success. As Warren Buffett says, "Investors making purchases in an overheated [stock] need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."

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 identify tomorrow's big movers. Over time, consistently reverse-engineering winning -- and losing -- stocks will help you retire wealthy.

Log in to CAPS today and start participating. It's absolutely free -- and a lot of fun!