In our January column, we discussed how growth rates, sales levels, earnings, etc. mean virtually nothing in a vacuum. Over the short-term, company stocks move on variance from expectations.

However, we also noted that the stocks of truly great companies generally outperform the stocks of very bad ones because great companies increase earnings and cash flow, which typically leads to increasing stock prices.

Bearing in mind that in the short term stocks are typically driven by variance from expectations, earnings growth is a key driver when thinking about long-term stock performance. Although stocks are more likely driven by cash flow, earnings are more broadly watched, can provide investors with other information about a company, and can act as a proxy for cash flow.

In general, over the long term, companies with rising earnings have rising stock prices. For example, from 1988 to the present, Fastenal's earnings per share increased from $0.08 to nearly $2.00 — a 25-fold increase. Over the same time frame, Fastenal's stock increased from $2.37 to over $64 — a 27-fold increase.

One factor clearly related to earnings growth is increasing margins. Increasing margins can signal pricing power, cost reductions or productivity increases, among other positive trends.

Hughes Supply, for example, saw its stock increase from less than $10 in 1992 to over $35 in 1998 as EBIT margins increased from 0.8 percent in 1992 to about 4.4 percent in 1998. After the peak, the stock fell for about three years as margins contracted.

Revenue growth is also inextricably tied to earnings growth and therefore can be a long-term driver of stock prices.

For example, before MSC Industrial's 1996 IPO through mid-1998, revenue growth was 20-55 percent. The stock nearly tripled over the same time frame. When revenue growth fell to 11 percent in fiscal 1999, the stock fell to pre-IPO levels.

While over the short-term stocks are driven by variance vs. expectations, long-term performance is driven by earnings growth.