Typically, we discuss companies in terms of their industry positions, business models or other attributes, and how they may or may not be "successful." This month, rather than talking about what makes good companies , we discuss what makes potentially good stocks.

Over the long term, the stocks of great companies will generally outperform the stocks of bad ones because great companies increase earnings and cash flow, which typically leads to increasing stock prices. Bad companies find a way to become extinct — and no matter what the price of the stock when you bought it, when it goes to $0, you lose 100 percent of your investment.

Assuming you've determined a company is good, your decision of when to buy stock should be based on two factors: 1) an accurate view of the future (typically earnings and cash flow projections) and 2) the extent to which your view differs from the prevailing expectations reflected (or "discounted") in the current stock price. Prevailing expectations can be set by the company's own guidance, analysts' projections, or opinions of others who comment on the company.

This is why a company reports earnings up 50 percent and the stock falls, or reports earnings down 50 percent and the stock shoots up. The reported number is a minor part of the story — it is the variance from expectations that matters most to short-term changes in stock prices.

Now when your friends are perplexed because a company reports 50 percent lower earnings and the stock goes up, you'll know why. The results will surely have been better than expectations. Near-term stock movement depends greatly on whether results are better or worse than the expectations discounted in the current stock price — just ask someone who invested in Cisco last March.

The bottom line is, if you're considering investing in stocks listed in the attached chart — or any stocks for that matter — remember that growth rates, sales levels, earnings, etc. mean virtually nothing in a vacuum. If you're confident that your view of a company's sales, earnings and cash flow is correct and significantly better than the expectations discounted in the stock price, consider making the investment.