By 
Michael Vodicka, Zack's Investment Research.
In spite of the recent selloff in the energy sector, most of these stocks are still trading with big gains on the year. This stands in sharp contrast to stocks from the financial sector, which have suffered steep losses as big banks have been forced to liquidate assets and raise capital to support their balance sheets.
Because these two groups of stocks have functioned as polar opposites during this stretch, it has provoked many conversations about which is currently the more attractive investment destination; high-flying energy stocks or beaten down financial stocks.
Its All About Earnings
When you take a look at the earnings picture, this argument becomes very one-sided.
Crude prices have recently dipped lower, but they are still very high when compared to historical norms, and this will translate into big earnings for energy companies. We can see this dynamic expressed through analyst estimates.
Encore Acquisition Co. (NYSE: EAC) shares are still trading up sharply on the year in spite of the stocks recent sell off, but estimates have risen in tandem with the stock price, with the current-year estimate advancing to $5.07 per share per share from $3.63 per share 90 days ago. This kind of earnings power provides plenty of fundamental strength for more share appreciation.
The earnings picture on the financial side looks very different. Wachovia Bank Corp.'s (NYSE: WB) share price is trading at half of its 2008 high, causing many investors to proclaim the stock is "cheap." But the company just posted a steep loss in its most recent quarter, and analysts are projecting sustained earnings weakness. The current-year estimate is now projecting a loss of $2.15 per share, down from a gain of $1.60 per share, 60 days ago.
Two More Stocks
On that note, lets take a look at two more stocks, one from the energy sector and one from the financial sector.
Apache Corp. (NYSE: APA) shares are also trading much higher on the year, in spite of the stock's recent sell off. But once again, this stock has advanced with analyst estimates. The current-year estimate stands at $15.53 per share, up from $13.01 90 days ago. At these levels, this stock looks like a huge bargain, carrying a forward P/E multiple of just 6.8X, a steep discount to the overall market.
Fannie Mae (NYSE: FNM) shares are trading at just a fraction of the stocks 52-week high after the company was rocked by liquidity issues. These lower prices have generated plenty of interest from investors, but the company's earning capacities have been severely damaged. The current-year estimate is projecting a loss of $6.01 per share, a steep increase from a loss of $2.02 per share 90 days ago.
Conclusion
Earnings are the most important factor driving share price appreciation. Earnings enable an investor to frame a company's stock price within the context of actual financial production. Stock prices will always swing wildly, but this in and of itself carries little value. By creating investment strategies that rely upon actual and projected earnings, investors are aligning themselves with companies that have the fundamental strength required to produce long-term gains.
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