This is a stock pickers’ market

With the August reporting season now behind us, investors can take a moment to reflect not just on how the companies they follow performed last financial year but more important, what guidance management provided on the outlook for the year ahead.

While there were some companies such as Flight Centre (ASX: FLT) who appear to have a good grasp of the outlook for their earnings – which is for growth – other companies such as Seven Group (ASX: SVW) could clearly see that earnings will decline in financial year 2014. However what was particularly glaring and is interesting to consider is just how many outlook statements completely lacked any form of guidance whatsoever.

Although the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is only up 0.77% in the last 30 days it doesn’t really tell the full story, with a number of widely followed stocks such as Ausdrill (ASX: ASL) rallying by over 50%. Market participants appear to have been clamouring to buy into any stock they feel might have been ‘over sold’ — particularly within the mining services space — presumably worried they are missing out on a rally of sorts. For example, after its superb profit result Flight Centre’s share price has been driven nearly 7% higher, however Seven Group’s share price, even after informing the market of its poor outlook, has been driven over 11% higher!

Foolish takeaway

The list of stocks making new 52-week highs seems to be increasing by the day, which given the over-all lacklustre picture for earnings growth would suggest investors (and speculators) are still prepared to pay ever higher multiples for stocks.

Given the dull outlook for earnings growth investors should be asking themselves what is driving stocks higher. Many companies look very fully valued or overvalued, which means this market is very much a stock pickers’ market. As much as ever, Warren Buffett’s timely advice that “price is what you pay but value is what you get” should be adhered to.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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