Earnings still a key to investment success

When some dotcom companies' stock prices were shooting up, a lot of investors downplayed the importance of traditional measures of stock valuation -- such as earnings.

Many of those high-flying Internet companies were losing money, quarter after quarter. Yet, investors flocked to them, attracted by their business models, their impressive sales and their very presence in a fast-growing market.

To these investors, the notion of earnings began to look like an antiquated yardstick, suitable only for those stodgy Old Economy stocks.

Then, some of the skyrocketing dotcoms fell to earth. And suddenly, investors began to realize that blue-chip stocks earned that designation by achieving a long, steady history of earnings.

Earnings are important to a stock's success. But the earnings issue may not be as clear-cut as you'd imagine. When looking at a company's earnings in relation to its stock price, keep two things in mind:

Solid companies, with good prospects, can still turn in poor earnings results -- A company's earnings can suffer from any of a variety of factors: an economic slowdown, product difficulties, execution issues, etc. Typically, these problems are temporary -- and a solid company with strong fundamentals can eventually transcend them. As an investor, then, you have to be able to look past a bad earnings report and see a company for what it truly is.