BY TOM HAYWOOD
Gannett News Service

With stock values soaring, despite last week's downturn, can you still invest in the market and make money?

Without a doubt, says Tom O'Hara, chairman of the National Association of Investment Clubs. You just have to know what to look for.

NAIC at a glance The National Association of Investors Corp. is a non-profit organization dedicated to investment education. For information about joining NAIC, call (810) 583-6242, or check the NAIC Web site at http://www.better-investing.org Where: Madison Heights, Mich. Members: More than 500,000, 60.5 percent female. Belong to investment clubs: 58 percent. Investment clubs: 25,409. Average investment club portfolio: $95,000. Average club age: 7 years, 3 months. NAIC members' income: 85.9 percent have family income over $35,000 a year. Average personal portfolio: $201,000.

The best stocks aren't always undervalued or blazing on the scene, he said. They're often obscure, but dependable performers you've never heard of. The trick is in finding them.

"It's really a quite simple thing," Mr. O'Hara said. If sales are up at least 50 percent - and preferably 100 percent - over five years and those same figures are reflected in earnings, the stock has potential.

"The whole belief is based on the fact you're really buying management. If it has the drive to push the company ahead, it shows in those figures," he said.

Of course, there are other factors to look at, such as the company's return on equity, pretax profit margins and the like. And that's where it can get complicated - and why tens of thousands of people have joined investment clubs affiliated with the non-profit NAIC to learn more about the fundamentals of investing.

Pat Flood, a Loveland resident and past president of Cincinnati's Women's Investment Club (WIC), said the idea of researching stocks was intimidating when she joined the club six years ago.

But she learned how to research, under the guidance of other WIC members and the information the group has received as a member of NAIC.

"Anybody thinking about starting a stock club, definitely should become member of NAIC. They have such marvelous learning tools," she said, noting many WIC members also find valuable information about companies at the library and on the Internet.

However, Mrs. Flood said, choosing stocks ultimately involves value judgments, based on what you think the stock will do in the future. "And nobody knows that," she said.

Information sources Publications Value Line, Investors Business Daily, Barron's, The Wall Street Journal, USA Today and The New York Times. Books 100 best stocks to own in America, by Gene Walden (Dearborn Financial Publishers). The Wall Street Journal Guide to Understanding Money & Markets, by Richard Wurman, Alan Siegel and Kenneth Morris (Access Press). The Small Investor: A Beginner's Guide to Stocks, Bonds and Mutual Funds, by Jim Gard (Ten Speed Press). Internet Hoover's Inc. lets you screen stocks of 7,800 publicly traded companies by more than 20 criteria. The free service is available at http://www.stockscreener.com

Here are some major areas NAIC suggests looking at when evaluating a stock's potential for your portfolio:

EARNINGS - No matter what anyone tells you about a company being hot, if its earnings are flat, look elsewhere. A dynamic company will have a track record of at least five years of rising sales and earnings.

Also, check to see if the company regularly reinvests a good portion of its earnings into expansion, Mr. O'Hara said. "The more it reinvests, the more profit it will derive. A company can't grow without more money being put into it."

PE RATIO - This is short for price-earning ratio, or how much the stock is valued in relation to its earnings potential. For instance, if XYZ Corp.'s stock closes at $20 a share and its earnings - not dividends - for the past four quarters were $2 a share, then its PE ratio is 10. Put another way, the price of an XYZ share is 10 times its earnings per share for the past four quarters.

In the past, the average PE of the Standard & Poor's 500 tended to range from 13 to 15 in a rising market and from 8 to 10 in a declining market. But the market today is so high, those old benchmarks have given way, Mr. O'Hara said.

Today, it's not unusual for a Dow Jones stock to have a PE of 20 or higher. Mr. O'Hara said he wouldn't be surprised to see that trend continue for another three or four years. But if it's a quality company it shouldn't cause too much concern, he said.

A high PE can also reflect financial strength. And while a low PE ratio can be a good reason to give a stock a second look, it's of less value to long-term investors than it is to active traders, Mr. O'Hara said.

YIELD - If dividends are rising, make sure it's supported by rising earnings. If the dividends aren't growing by 3 percent or 4 percent, it's not even keeping up with inflation and there may not be enough earnings to reinvest in the company. It's best to look for companies with dividends rising 10 or 15 percent. But, dividends are not a key figure, Mr. O'Hara said: "Sales and earnings are much more important."

BOOK VALUE - Simply put, the book value of a stock is its assets divided by the number of outstanding shares. A book value higher than 1.3 could be a problem, but not if the company is getting a good return on equity.

RETURN ON EQUITY - This can give you a good idea how well-managed a company is. Look for a pattern of growth and a return that is consistently high compared to other companies in the same industry. If a company is pulling down a 15 percent return, you can probably bet on it. Real top performers can get 30 percent to 35 percent.

DEBT-EQUITY RATIO - Companies with a lot of debt may not be good bets, so check it out. If the debt is more than 35 percent of shareholder's equity, you may want to take another look. But remember, there are differences in sectors. For instance, a utility with its stable customer base can carry a lot more debt than a manufacturer.

PRICE VOLATILITY - The measure of a stock price as opposed to the broader market is called its "beta." For long-term investing, beta's are of little consequence, Mr. O'Hara said.

There are other factors to consider, of course, such as the vitality of a company's industry and whether it's a leader in that sector. But it still comes down to the individual company, Mr. O'Hara said.

"Growth comes in two ways. Growth can be with the industry in general or it comes from strong management," he said. "We're basically interested in growth that comes from management. Growth from management keeps going on. An industry becomes saturated."

Don't get sucked in by a flashy management team or a high-profile stock without a track record. You've probably never heard of the stocks most widely held by the more than 25,000 NAIC clubs in existence.

More investment club money is in RPM Inc. stock than any other company. The Medina, Ohio, corporation traded on the Nasdaq Stock Market has been making paints and roofing materials as well as increasing profits for 49 years, 35 of them under the current CEO. It has grown 17.8 percent a year the past five years, and net income has increased at an annual rate of 16.7 percent.

And the most widely held stock in terms of shares: Aflac Inc., an insurer traded on the New York Stock Exchange. It has seen its sales grow 21.8 percent and net income grow 24 percent over five years.

Enquirer reporter Perry Brothers contributed to this report.