Hwstretch doesn't hurt anything, it works just great even on arcade monitors as they have very limited options on what resolutions they can display without having to crawl in the back and adjust the monitor to stretch it to full screen.
Thus the name hardware stretch.

There are many opinions on this, but at least in a windows environment, they way you are supposed to setup mame, regardless of the monitor is this:
1. Play with different resolutions /refresh rates and figure out which one gives the best picture with no physical adjustment on your system/monitor setup. The higher the resolution/refresh, the better. Ideally, it should be the highest resolution that monitor supports.
2. Turn all of this auto crap off in the resolution, and refresh rate.
3. Set it to that ideal resolution / refresh you found earlier.
4. Turn on hwstretch and set the d3d "effect" to either none or sharp.
Now, like magic, games all display full screen without any adjustment! Games that run on a lower resolution than the manual resolution you set are automatically scaled up via your video card, with 0 effect on performance. Why this is such a difficult concept for everyone to grasp is beyond me.
Are there exceptions? Of course! But I can count the exceptions on my one hand and it is far easier to setup the bulk of your games like this and go back and tweak a handful of games than the other way around.
Conclusion: Hwstretch is your friend! You should almost always use it.
For those nay sayers that say "but hwstretch makes things look blurry" I suggest you look above and properly set the "effect" flag. If it still gives you trouble then throw away your pos video card and get a new one as any "blurring" you get comes directly from how your vid card handles stretching. It's not mame's nor the hwstretch option's fault.
For additional nay sayers that say "but I have an arcade vga" to you I say this. You can't display all the games properly anyway, even on the ultimarc site it admits to this. Hwstretch may not give the best picture on all games, but at least it can shrink/stretch the display for you so that it is actually visible. So no, it won't give good picture quality in some cases, but a crappy picture is better than no picture at all imho. And like I said, you can always go back and manually tweak a few problem games, what hwstretch does is keep you from having to even worry about the bulk of them. It's there to make your life easier, so take advantage of it!
Ok, I'm done. Flame away!