As earnings season heats up, stock selection matters more than ever. Retailers face a consumer test, miners and banks have run hard, and investors need to think carefully about when to lock in gains.

Welcome to ASX Stock Pulse, where we break down the stories that matter before the crowd catches on.

This is a big week for the Australian share market. We are now well into earnings season and two expressions come to mind:

Take profits. Bank dividends.

What we are seeing this reporting season is very much a mixed bag. It is no longer a case of a rising tide lifting all boats. Individual stocks are increasingly having to fend for themselves.

That drives home one of the principles we continually emphasise at Under the Radar Report:

It is the price you pay for a stock that ultimately determines your return.

Being a value investor matters more than ever. Simply jumping onto momentum trades is not working across the market.

Retail faces a big test

One of the areas where the variations in stock returns are becoming particularly obvious is retail.

And this is a major week.

Coles, Woolworths and Wesfarmers are all reporting results.

Their earnings are important not only for shareholders, but because they provide a valuable real time indication of what is happening with the Australian consumer.

Company trading updates can tell us what consumers have actually been doing through July and August. That is information investors need to listen to closely.

The backdrop is complicated by deteriorating sentiment around property.

Housing is simply too important to the Australian economy not to have an impact. There is the leverage associated with housing, the effect on consumer sentiment and, importantly, the wealth effect.

If consumers no longer believe their house will continue rising in value, does that change how much they are prepared to spend renovating it?

That makes Wesfarmers particularly interesting.

Around 60% of Wesfarmers’ earnings comes from Bunnings, where earnings growth in recent periods has slowed considerably.

Last week’s results also gave us an important clue about the consumer. In the words of JB Hi Fi, customers are increasingly “value orientated and promotion driven.”

This week’s retail results should give us a much clearer indication of how widespread that behaviour has become.

Investors are looking beyond consumer spending

The other side of this story is that companies less directly exposed to discretionary consumer spending are attracting investor interest.

We saw a powerful example last week with CSL, which surged close to 30% after essentially delivering what investors had been expecting.

This is also reflected in some of the Blue Chip stocks we are recommending at Under the Radar Report.

Companies such as AGL and Origin Energy are not dependent on consumers deciding whether to buy another television, renovate a kitchen or spend more at the shops.

In the current environment, that distinction matters.

Mining stocks have had an extraordinary run

Miners are another group that are not reliant on discretionary consumer spending.

They have benefited from substantial increases in commodity prices and their share prices have responded accordingly.

These companies can certainly pay attractive dividends, but recently their share price appreciation has gone far beyond the dividend story.

BHP, for example, has returned around 60% over the past 12 months, with much of that acceleration occurring during the past six months.

Mathematically, that sort of performance cannot continue indefinitely.

South32, which reports this week, has returned around 85% over the past 12 months.

Eighty five per cent in one year is an extraordinary return.

That does not mean investors necessarily need to sell everything. But it does mean there is a strong argument for taking some profits.

Take your costs out and let your profits run

At Under the Radar Report, taking profits does not normally mean selling an entire position.

Our approach is often:

Take your costs out and let your profits run.

We have done exactly this across our Small Cap portfolio.

We have taken profits in stocks including:

• Evolution Mining
• Southern Cross Electrical
• Superloop
• Austal

Yet many of these companies have continued making a positive contribution to portfolio performance because we retained exposure to further upside.

That is an important distinction.

You can remain exposed to a strong sector such as mining while still banking some of the gains generated along the way.

Don’t wait for the bad news

The same principle can be applied to banks and other stocks that have experienced very strong runs.

Sometimes the best time to take profits is when the news is still good.

When investors have already enjoyed a plethora of positive news, much of that optimism can become reflected in the share price. Eventually the market starts pricing stocks as though the good news will continue forever.

That is when taking some money off the table can make sense.

If you wait until there is an obvious piece of negative news before deciding to sell, there is a good chance everybody else will be heading for the exit at the same time.

By then, you may be selling into an avalanche rather than taking profits into strength.

What investors should watch this week

Earnings season is showing us once again that this is a market where stock selection matters.

Retailers will tell us more about the health of the Australian consumer.

Property sentiment could increasingly influence spending decisions.

Companies with limited exposure to discretionary spending are attracting attention.

And after spectacular gains in miners and banks, investors should think carefully about whether it is time to bank some profits rather than assuming recent returns can continue indefinitely.

The message for the week ahead is simple:

Buy value. Bank dividends. And when stocks have run hard, don’t be afraid to take some profits while the news is still good.

Richard Hemming is the founder of Under the Radar Report. ASX Stock Pulse breaks down the Australian share market stories investors need to know before the crowd catches on.