With corporate earnings collapsing these days, some growth funds are modifying their approaches.

Instead of straining to find stocks with rapid earnings gains, portfolio managers are settling for companies that are reporting little or no growth. But not all growth funds have shifted. Some managers are sticking to their rigid disciplines, combing through the stock universe to find the limited number of companies that are still reporting rich profits.

Consider Bob Auer, the consistent manager of Auer Growth ( AUERX). Year after year, Auer only takes stocks that grow at an annual rate of at least 25% and sell for a price-to-earnings ratio of not more than 12. "We want to pay less and get more," Auer says.

The growth fund currently holds 202 stocks that have passed his screens. In recent years, Auer has owned as many as 250 stocks. The total slipped to 150 in 2002, a recession year.

To find stocks, Auer considers 9,000 candidates, ranging from tiny companies with market capitalizations of less than $10 million to the giants of the S&P 500. Computers could do the work, but most programs are not as current as the news columns of The Wall Street Journal and Investor's Business Daily. So Auer relies on the newspapers and a pair of scissors.

Every day he flips through the papers looking for quarterly earnings reports. Once he finds a candidate, Auer cuts out the article. Besides examining the earnings growth and P/E ratio, he also reviews the balance sheet to make sure the business is not about to go bankrupt. As a final check, he examines statements by the company. If the chief executive forecasts that earnings will fall, Auer stays away.

The names in Auer's portfolio have managed to achieve remarkable growth. Flowserve ( FLS), a maker of valves and pumps, reported an earnings increase of 86%. With Middle Eastern oil producers increasing their orders, sales jumped 26%. But the market seems unimpressed. The shares have dropped from more than $140 in July to around $50 now.

Auer says his strategy has outdone the S&P 500 by a wide margin during the past decade. But lately, Auer Growth, like many growth funds, has lagged the benchmark. "Investors are dumping everything," says Auer. "They don't care about earnings growth."

Another strict growth proponent is Jensen ( JENSX), which has returned 4.2% annually during the 10 years ending in October, outdoing 94% of its large-growth competitors. The fund takes companies that have reported annual returns on equity of 15% for 10 consecutive years. Of the 10,000 publicly traded companies, only about 100 pass that formidable test. Companies that survive the screens tend to be dominant businesses with competitive advantages.

Holdings in the portfolio include such powerhouses as Procter & Gamble ( PG) and Johnson & Johnson ( JNJ). These blue chips have proven that they can be profitable in good times and bad, says portfolio manager Robert Zagunis. "Right now we expect to see some earnings growth for our companies, even though the overall market may be weak," he says.

Jensen sells stocks when their returns on equity drop below 15%. But, so far, most names in the portfolio are well above the minimum, reporting an average return on equity of 27%. "Our stocks could earn a lot less and still be above the minimum requirement," says Zagunis.

In previous recessions, few of Jensen's holdings have failed the test. The fund rarely sells positions entirely and has an average annual turnover of less than 10%.

Investors who want to focus on pockets of extreme growth can try Black Oak Emerging Technology ( BOGSX). Many stocks in the portfolio have been reporting growth of more than 20%. Portfolio manager Robert Stimson has been emphasizing technology companies that can help others cut costs. "As the economy slows, demand will remain strong for services and equipment that can help reduce payrolls," says Stimson.

A fast-growing holding is Cognizant Technology Solutions ( CTSH), an outsourcing firm that designs software in India. Revenue has been increasing at a 31% rate.

Funds that hold such growth stocks have been languishing lately. For 2008 through Dec. 11, the average large-growth fund lost 43.2%, about 3 percentage points behind large value, according to Morningstar. But when the economy eventually revives, funds that focus on growth could shine again.
Stan Luxenberg is a freelance writer who specializes in mutual funds and investing. He was formerly executive editor of Individual Investor magazine.