Australian companies have delivered some tasty results this reporting season, but the market still suffers indigestion from the global financial crisis and is a little more hesitant to 'tuck in'. This, however, provides investors with the opportunity to have more for less. But watch what you eat!

The February/March reporting season has many Australian companies either meeting or exceeding market expectations, but having any hope of a share price appreciation quashed by the greater forces of macroeconomics and overall market psychology.

Miners have been no exception to this phenomenon and it has frustrated some CEOs to deliver a great, or even record, result, only to see a sovereign debt crisis in Greece, or a speech out of Washington, have a far greater impact on shareholder decisions to buy, hold or sell.

Of course, this scourge of macroeconomics is nothing new to market-tried CEOs, especially after the events of 2008 and 2009. What we are seeing this year however, as impacting on the reception of corporate earnings, are views on the Australian dollar and commodity prices in general - two things that are interlinked but have a very different impact on the bottom line.

Relationship between Australian dollar and commodity prices

All things being equal, as commodity prices rise, so does the Australian dollar. What this means is higher profits in, say, US dollars, but in Australian dollars the effect is somewhat nullified. What has been happening recently is that the Australian dollar has been rising on other factors such as a widening US fiscal deficit and musings from the likes of Moody's, a credit rating agency, and PIMCO, a major bond market investor, that America is not the AAA-rated safe haven it once was.

This, rather than a similar boom in many of the things that Australia exports, has been making our dollar expensive and has thus been a dampener on corporate profits, especially in the resources sector. Commodities, meanwhile, are offering conflicting signals. For example, copper is signaling both a rise and fall, based on which technical analyst you speak to on the back of mixed global stockpile levels. And depending on what your views are on fiat currency, the US economy, China, India or the global recovery, gold is either on the cusp of a massive rally, or is massively overvalued.

The possibility of a special mining tax, introduced on recommendations in the Henry Review, has also spooked the market and has proven once again that the government is no puppet of the investor relations fraternity. As the details of this proposed tax remain hidden from view up until the next election, we cannot speculate on the potential impact, therefore further uncertainty in trading patterns can only be expected.

Lincoln is expecting an upward bias overall for the market on the back of improved global economic activity. However expect more of this choppiness in the short term until the global economy works out whether it is improving or flat lining, and until the market works out whether it is bullish or bearish. As such, we expect markets to continue to be ambivalent about mining sector earnings currently, and again in August/September 2010.

Stocks to watch

As 'bottom-up' fundamental investors, we see great opportunities for value investing going forward, particularly those companies that are mispriced due to 'expectations' driving short term sentiment. Look for strong Financial Health, which is Lincoln's first 'Golden Rule' for successful investing. Financial Health, as always, is built on steady cash flows, stable balance sheets and reliable profits. Also look for management that delivers good earnings growth and return on assets, the second 'Golden Rule'. And, depending on the amount of money you invest, look for sufficient liquidity and market capitalisation so that you can move in and out with safety.

Unfortunately, owing to the inherently speculative nature of much mining and mineral exploration activity, most companies in the resources sector do not enjoy strong Financial Health, according to Lincoln's criteria. These companies, most of which are in the small to mid-cap space, sometimes do offer the most opportunity for share price appreciation, but they also provide the most opportunity for investor heartburn.

Apart from a number of examples, notably in the coal and coal seam gas spaces, industry Price to Earnings (PE) multiples are at medium-term lows of around 12 and 13 times. Average yields, for those miners that do pay dividends, are also higher than usual and with the relative bounce-back in commodity demand between the six months to December 2009 and the previous corresponding period, PE to growth ratios (PEG) are also relatively low, which means that earnings growth is a cheaper commodity than it once was. Every positive result that is promptly ignored by the market is an opportunity for us to buy-in at lower PE multiples and, if applicable, to also enjoy higher dividend yields.

BHP Billiton Limited (BHP)

BHP obviously rates in terms of balance sheet strength being in a Strong Financial Health position and recently announced a strong interim result. With record production levels achieved at a number of projects, it is leveraged highly to the world recovery and improving commodity prices across the board. BHP's improved production result was reflected in a strong earnings result, despite coming in lower that the previous corresponding period.

Equinox Minerals Limited (EQN)

While the company does not have a long history of strong performance, the development and production schedules for Lumwana have all been met and expectations so far have been met and exceeded with improving production every quarter. Low debt and improving profits result in a Satisfactory Financial Health for EQN. With copper prices rising a low cost mine with a long mine life like Lumwana is attractive at this stage of the cycle. The company's annual report should be strong and illustrate improved earnings, but expect this result to continue to improve with copper prices as the company strives to achieve full capacity production at this project.

Energy Resources of Australia Limited (ERA)

ERA produced a mixed result recently where annual production for 2009 had fallen 2% compared to 2008. However stronger uranium oxide prices realised in 2009 somewhat offset this. Production rates are expected to improve mid 2010 with the completion of mine sequencing. In 2009 ERA's revenue and profit increased 55% and 23% respectively, and with a Strong rating for Financial Health we believe ERA offers an opportunity to be exposed to a longer term return to favour for uranium.

Lihir Gold Limited (LGL)

Currently in a Strong position of Financial Health, LGL produced a strong annual result with record gold production and benefiting from rising gold prices. Production for 2010 is forecast to be between 960,000 and 1,060,000 oz, therefore growth going forward will be predominantly determined by gold price movements. Of further interest, the resignation of CEO Arthur Hood amid criticism of his 2007 acquisition of the Ballarat goldmine, will be an interesting side act.

ERA, LGL and EQN are all Lincoln 'Star Stocks'. To be a Star Stock, a company has to have 'Strong' or 'Satisfactory' Financial Health, according to our analysis of key ratios in their profit and loss, balance sheet and cash flow statements, as well as strong earnings per share growth of at least 8 per cent per annum and annualised return on assets of at least 8 per cent as well.

BHP, with its Strong Financial Health, and 19.62 per cent return on assets to the last financial year, is also robust. Currently our preferred coal stocks are Centennial Coal Limited (CEY) and Macarthur Coal Limited (MCC). Both are financially healthy, growing earnings strongly and expected to continue to benefit from a strong outlook in the short term for the coal sector.

What's on the menu going forward

Beyond value investing, 2010 also presents opportunities to get on board some emerging sectors and continuing trends. Lithium will likely remain in the headlines, as will rare earths, as consumers and the industry look to new non-carbon sources of power and the continued need for new battery and fuel cell technologies. We see uranium rising in sentiment as the same dynamic that caused prices to spike in 2007 returns to the fore. That dynamic - a medium to long-term prediction of energy demand in a post-carbon world - should also make geothermal stocks attractive in the coming year.

Expect opportunities for value amid a confused and choppy market, plus some emerging and continued trends for commodities that play into the climate change story. As always however, consider fundamental values when choosing a stock within an investing theme. Notwithstanding the usual Financial Health warnings, a rich menu of opportunity awaits this earnings season. Bon appetit.