Philip Fisher: Growth Stock Investigator

Legendary Investor

Philip Fisher: Growth Stock Investigator

Matthew Schifrin, 02.23.09, 06:00 PM EST

His idea of buying growth stocks and holding them forever sounded good--even to Warren Buffett.

Philip Fisher




Who was Philip Fisher?

Most Forbes readers are familiar with Ken Fisher, money manager billionaire and longtime Portfolio Strategy columnist in Forbes magazine. However, what isn't as widely known among younger investors is that Ken Fisher comes from investing royalty. His father was Philip Fisher, who, starting in 1931, ran a small Northern California investment counseling firm. In 1958, Phil Fisher wrote the first investment book ever to make The New York Times bestseller list, Common Stocks and Uncommon Profits. It also became required reading in the investments class at Stanford's Graduate School of Business (where Phil taught for a time).

The book laid out senior Fisher's 15-point strategy for finding great long-term growth stocks at a time when most investors and strategies swung with business cycles. His methods were so convincing that a young Warren Buffett went to visit with Fisher and eventually incorporated a good deal of Fisher's methods into his own stock selection process. Buffett later described his strategy as 15% Fisher and 85% Benjamin Graham.

As Ken Fisher recounts in the forward to his father's classic investment tome, his father was a bit impatient and the young Fisher only worked at his father's firm briefly. But Fisher went on hundreds of company visits with his father in the 1970s and absorbed his father's investigative style of investing. Still, young Fisher's response to people who would often ask him which experience with his father was his favorite was, "The next one."

Ken's strategy, which focuses largely on stocks undervalued according to their price-to-sales ratios, is much more straight value in it's approach. He seeks stocks that are cheap because they have an undeserved bad image. His father, who wrote his book during a time of great prosperity that resulted in a long post-World War II bull market, wanted stocks he could hold forever because they were well managed and would continue to grow. In fact, by the time Philip Fisher died at the age of 96 in 2004, he still held shares of Motorola (nyse: MOT - news - people ) that he had purchased 21 years earlier. The stock had appreciated more than 20-fold versus a seven-fold appreciation of the S&P 500.

Phil Fisher's 15-point approach essentially attempts to determine whether a company is in a position to continue to grow sales for several years, has an innovative and visionary management, strong profit margins, effective sales organization and high-quality management. Fisher also argued against over-diversifying and, in his heyday, tended to hold only about 30 stocks. This is one of the Buffett strategies borrowed from Fisher as was his don't follow the crowd approach.

Not insignificant in Fisher's approach to growth stock investing was something he called "scuttlebutt." This was the process of veering from printed financial stats or company disclosures. Fisher felt strongly that investors should "investigate" potential portfolio holdings by questioning customers, competitors, former employee's and suppliers, as well as getting information from management itself. The art to this was not just in the answers Fisher got, but in asking the right questions.

Thanks to help from the American Association of Individual Investor's Stock Investor Pro software, Forbes.com recently created a Philip Fisher screen. Below are the criteria used and 10 stocks that passed our Fisher test. Of course, true Phil Fisher devotees will need to do the "scuttlebutt" part of the analysis on their own.

*Net profit margin for the last 12 months and each of the last five fiscal years is greater than the industry's median net profit margin for the same period.

*Sales have increased on a year-to-year basis over each of the last three years (Y4 to Y3, Y3 to Y2, Y2, to Y1) and over the last 12 months (Y1 to 12 months).

*The three-year growth rate in sales is greater than or equal to the industry's median sales growth rate over the same period.

*The company is not expected to pay a dividend in the next year (indicated dividend is zero).

*The ratio of the current price-earnings ratio to the estimated growth rate in earnings per share (PEG ratio) is greater than 0.1 and less than or equal to 0.5.

Company Business
Price Market Cap Five-year PEG Ratio Five-Year Sales Growth Net Profit Margin
America Movil (nyse: AMX - news - people ) Communications Services
$31.05 $53.5 billion 0.2 39.1% 31.2%
NII Holdings (nasdaq: NIHD - news - people ) Communications Services
$20.56 $3.4 billion 0.9 33.4% 11.6%
Inverness Medical Innovations (amex: IMA - news - people ) Biotechnology & Drugs
$25.09 $2.0 billion 32.3% -4.2%
Sohu.com (nasdaq: SOHU - news - people ) Computer Services
$45.61 $1.8 billion 0.2 45.8% 31.4%
General Cable (nyse: BGC - news - people ) Communications Equipment
$19.61 $1.0 billion 26% 3.9%
Arena Resources (nyse: ARD - news - people ) Oil & Gas Operations
$26.8 $1.9 billion 0.1 125.9% 37.6%
EZCORP (nasdaq: EZPW - news - people ) Retail (Specialty Non-Apparel)
$13.87 $599.3 million 0.3 17.3% 11.5%
Cabela's (nyse: CAB - news - people ) Retail (Specialty Non-Apparel)
$6.32 $421.4 million 0.6 13.9% 3.2%
Team (nasdaq: TISI - news - people ) Business Services
$16.49 $310.5 million 0.3 39.1% 5.2%
Volcom (nasdaq: VLCM - news - people ) Apparel/Accessories
$9.52 $232.0 million 0.2 36.3% 11.2%
Continucare (amex: CNU - news - people ) Health Care Facilities
$1.96 $117.2 million 0.3 21.2% 5%

Source: AAII Stock Investor Pro.


http://www.forbes.com/2009/02/23/philip-fisher-growth-personal-finance_philip_fisher.html