When Philip Fisher wrote Common Stocks and Uncommon Profits in 1958, he documented a now famous approach to growth investing. His focus on robust management and strong company growth prospects has proved to be a lucrative blend. It has also proved an inspiration to his peers, including Warren Buffett. Fisher’s legacy is a powerful approach that continues to produce strong stockmarket returns. So far in 2012 Stockopedia’s interpretation of his strategy has been among the best performing growth investing screens, with a 24.8% return versus 9.4% for the FTSE 100. According to AAII, stocks passing their interpretation of the Fisher screen tracked between January 1998 and August 2008, produced an astonishing cumulative return of 133.5%, versus 32.2% for the S&P 500.
Recently we took a closer look at how Fisher’s approach to growth investing works. At its heart is a 15-point list of demanding buy criteria that mixes quantitative and qualitative analysis with a focus on exploring each stock’s potential to grow. In his book, Fisher insisted that the best time to sell a stock that had met these criteria was “almost never” provided the investor’s assessment of the company was accurate.
Management integrity & growth characteristics
Fisher's whole approach is based on the idea of “scuttlebutt”, or looking beyond simple financial statements to pull together all sorts of information about a stock in order to get a detailed view of it. The points he looked for can be split up into two categories:
1. Management Qualities - He looked for depth, integrity, transparency, a long-term outlook, good staff relations and excellent financial controls.
2. Business Characteristics - He looked for business characteristics that would support sustainable growth, namely a strong sales function, products or services with sufficient market potential, a commitment to ongoing product development through R&D and outstanding competitive positioning.
He was also most comfortable when investing in large manufacturing companies that had a scientific element to them.
Spirit of Fisher
As with any quant screen approach, Stockopedia’s version of the Fisher screen inevitably has a numerical bias, focusing on key growth and quality ratios like sales growth, high margins and a compelling price/earnings growth rate (PEG). There are currently 22 stocks on the screen from a broad range of sectors.
However, Fisher was not simply a ‘paint by numbers’…