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 low-rated Hartford Financial (NYSE:HIG): Stocks go up all the time, but unless you were able to predict the pop, what does it matter? 

Our community of more than 140,000 CAPS Fools considers its high-star stocks the most likely to outperform the market.

Written in the (five) stars?
For example, 94.8% of the 267 All-Star members who've rated Headwaters have a bullish opinion of the stock. In late April, one of those top Fools, Babachrono, explained why the building materials supplier looked like a good bet to bounce back:

Believe it will improve as the housing market picks up and then with the push for clean energy. Looks to me to have more upside than down, going to get in here low and watch. Main concern and point to watch is if they keep burning through cash, or can stop that process and delay unnecessary items until their cash flows improve.

Following yesterday's double-digit pop, shares of Headwaters are up 44% since that call.

The bullish lesson?
Learn to pounce on stocks priced for imperfection. It's virtually impossible to call a stock's "bottom," but if you're confident that the risks are already baked into the price, there's a good chance your investment will turn out well. As Warren Buffett said, "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

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 plunge in highly rated American Reprographics may have caught our community off guard, low-ranked stocks are fully expected to fall hard.

Did CAPS call the fall?
In May, for instance, CAPS All-Star zzlangerhans predicted a giant leap back for MannKind:

Any professional biotech analyst will tell you that the critical factors to watch in a baby biotech are cash, burn, and the timing of catalysts. ... Does Afresa work? Very likely. Is it safe? Probably. Will the FDA approve it on first pass after getting faced on Exubera? Don't bet on it.

Consistent with that warning, shares of MannKind plummeted over 30% yesterday after the company said it would be unable to sign a partner for its inhaled insulin Afresa by year-end, raising concerns that the FDA will indeed delay the product's approval.

The bearish takeaway?
Always follow the cash flow. Investing, after all, is about laying out money today in order to receive more of it in return tomorrow. If a company continuously burns through large amounts of cash, while having little hope for any near-term relief, 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 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!