An introduction to the godfather of growth investing.
Each day this week, I'm studying a master investor, introducing you to his approach and running a 'stock screen' to unearth examples of the type of company his approach produces.
Yesterday, we looked at Ben Graham, the pioneer of deep value investing. Today, we're going to look at Philip Fisher (1907-2004), who might be called the Godfather of Growth.
Originally published in 1958, Phil Fisher's Common Stocks and Uncommon Profits became the first investment book to make the New York Times bestseller list.
In the book, Fisher set out his approach of identifying fast-growing, innovative companies – "outstanding investment possibilities" that were "beneath the notice of conservative investors or big institutions."
Fisher researched companies in great detail, not by immersing himself in the minutiae of their financial statements, but by employing his 'scuttlebutt' method. He spoke to anyone and everyone who had some connection with the company: employees, customers, suppliers, trade-association executives, academic and government researchers and so forth.
In cases where the scuttlebutt was preponderantly favourable, Fisher sought to fill in any gaps in his knowledge by using a checklist of 15 questions:
- Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will still further increase total sales when the growth potential of current product lines has largely been exploited?
- How effective are the company's research and development efforts in relation to its size?
- Does the company have an above-average sales organisation?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labour and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but 'clam up' when troubles or disappointments occur?
- Does the company have a management of unquestionable integrity?
As you can see, Fisher was far more interested in understanding a business qualitatively than in what he referred to as "cloistered mathematical calculation".
Buying and selling
Fisher was highly sceptical of valuation methods such as the price-to-earnings (P/E) ratio -- and especially sceptical of the ability of analysts to accurately forecast earnings!
Because outstanding companies routinely beat analysts' forecasts, Fisher took analysts' valuations with a pinch of salt: "If the growth rate is so good that in another ten years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35% overpriced?"
Fisher believed in having a concentrated portfolio of shares, on the grounds that "a little bit of the great many can never be more than a poor substitute for a few of the outstanding."
He had three criteria for selling a share:
- When it becomes increasingly clear that the factual background of the particular company is less favourable than originally believed.
- When the company no longer passes the 15 tests to the same degree it qualified at the time of purchase.
- When an alternative company with seemingly much better prospects is discovered.
Ideally, though: "If the job has been correctly done when a common stock is purchased, the time to sell it is -- almost never."
A Fisher screen
Even though Fisher wasn't fixated on numbers, plugging a few simple criteria into a stock screen should toss up some companies that have potential Fisher characteristics.
I set filters of a 'growthy' minimum P/E of 20, minimum latest-year earnings growth of 20%, and minimum latest-year sales growth of 15%. For a manageable list of companies for this article, I restricted the screen to FTSE 250 and FTSE Small Cap firms.
|Company||Market cap (£m)||Share price||Sales growth (%)||Earnings growth (%)||P/E|
|Betfair (LSE: BET)||808||782p||15||50||23.3|
|Imagination Technologies (LSE: IMG)||1,629||582p||21||61||57.1|
|Oxford Instruments (LSE: OXIG)||658||1,154p||24||48||28.2|
|Rightmove (LSE: RMV)||1,599||1,485p||19||20||29.8|
|Telecity (LSE: TCY)||1,607||792p||22||29||32.4|
|Umeco (LSE: UMC)||268||555p||19||37||22.5|
|Xaar (LSE: XAR)||170||231p||26||68||20.6|
A quick run-down of the businesses:
- Betfair pioneered the first successful online betting exchange.
- Imagination Technologies' intellectual property is at the heart of many mobile and entertainment devices.
- Oxford Instruments designs hi-tech tools and systems, such as nanotechnology instruments.
- Rightmove is the leading property website in the UK.
- Telecity operates 22 data centres in prime city-centre positions across Europe.
- Umeco is an advanced materials and tooling firm in the aerospace sector.
- Xaar is at the forefront of inkjet technology in the digital printing and industrial markets.
The screen has produced companies that are certainly strong on innovation, but I'll have to leave you to do the scuttlebutt and 15-point checklist if any of them grab your interest!
Foolish bottom line
Philip Fisher's growth approach was very different from the value methods of Ben Graham. However, both men had an influence on the world's greatest living investor -- whose approach we'll be looking at tomorrow.
Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.
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G A Chester does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Imagination Technologies.