Value Investors, Remember Earnings

Most of my columns over the past two and a half months have cautioned investors to protect their investments and take profits.

But as a money manager, I always like to look at both sides of the picture, so in this column, I'll look at a positive aspect of the market: earnings projections.

No matter how bad the equity markets get, investors eventually start to look at value and earnings. This is why I am always encouraging investors to build watch lists of companies that have growing earnings and sales when the market is selling off in an overreaction.

Companies that consistently grow earnings usually will hold up better in market downdrafts than companies that don't. This also goes for industry groups. A group that is holding up technically or going down less than the rest of the market may be preparing to take a leadership position.

I look for those characteristics when I scan the market to find sectors and stocks that fit my model. And when I find superior strength in a sector or stock, I start digging deeper by researching the supply/demand situation in the industry to see if there is a catalyst to continue to push the group higher.

If there is, I want to find the best companies in the group from fundamental standpoints such as earnings and sales growth, debt-to-equity ratio, return on equity and profit margin.

If you look at valuation and earnings going forward in 2006, the picture isn't that bad. The recent rotation of institutional money into defensive stocks such as consumer cyclicals signals expectations of a slowdown in the economy. However, Dirk Van Dijk of Zacks Investors Research writes in "Earnings Trends" that company earnings are very robust, with no sign of them softening anytime soon.

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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.