My entire practice toward stock investments could be stated as “buy” primarily on the balance sheet and “sell” primarily based on earnings. I mention in my book, “Choose Stocks Wisely,” that earnings drive the stock price. Earnings don’t define value under my approach (the balance sheet does) but earnings will be the likely stock price driver if I’m to experience solid returns.

The fact that earnings drive stock prices means that once I’ve determined that the amount and quality of equity is appealing relative to potentially investing today, I need to evaluate the potential for a positive earnings catalyst arising that will bring attention to the “as-of-yet undiscovered value.”

Stocks get as cheap as they do sometimes largely because the stock market is less than enthralled with company earnings. Companies can hit the “ignore list,” so to speak. So, what will get them off the ignore list and favored by the investment community? It will likely be a positive earnings surprise in a quarterly earnings report.

So after assessing the balance sheet and determining a stock price today is backed by substantial and quality equity, my job before hitting the buy trigger is to assess the likelihood of a favorable earnings catalyst on the horizon. We will need to read carefully the most recent corporate earnings press releases to discern what management has to say about the prospects for future profits. The more positive the tone and the more near-term the language, the better.