A growth screen based on the work of Philip Fisher. Fisher was one of the investment community’s most revered growth investors, with a 74 year career that saw him not only deliver strong returns for his clients but also influence some of the greatest investing minds in the world, including Warren Buffett.
Fisher was born in the US in 1907 and died in 2004. His hugely popular book Common Stocks and Uncommon Profits was first published in 1958 and helped to cement his reputation as a hugely influential investor. Central to his philosophy of buying stocks was a search for companies with strong management teams and equally strong growth prospects. Fisher started his own investment management firm in 1931 (now Fisher Investments) and did not retire until the age of 91.
The firm is now headed by his son, the highly regarded value investor, Ken Fisher, whose stock picking strategy is also tracked by Stockopedia. Among Philip Fisher’s most famous admirers is the world’s most successful investor Warren Buffet, who once claimed he was ‘85% [Benjamin] Graham and 15% Fisher’.
In the 1929 stockmarket crash, Fisher lost money on his investments after buying stocks that looked cheap on a price/earnings basis. He went on to rely less on the P/E as a measure of value and focused more closely on growth factors. His own preference was for manufacturing companies, a sector he understood, and he advised against diversifying too much, with a limit of 20 stocks in a portfolio. Rather than looking for undervalued stocks, Fisher would seek out much higher returns from those companies that he believed could outperform the market in terms of growth in sales and profits over the long term. He was particularly interested in firms that had a competitive advantage as a means of delivering consistent sales growth.
Naturally he was wary of stocks that pay dividends, preferring cash to be recycled in order to fund growth. His attention to the integrity of management was a major factor in this respect because he had to be sure that excess cash would not be wasted on poor decisions and needless empire building by profligate executives.
In Common Stocks and Uncommon Profits Fisher lifted the lid on his blend of quant and qualitative analysis of stocks. In the preface to the latest edition, his son Ken explains:
“...this book teaches that if you figure out the right things to buy, selling becomes a lot less important because you can hold the stocks you own for longer. And what to buy derives directly from my father's fifteen points.”
The fifteen points that Philip Fisher went on to outline were linked to what he described as “scuttlebutt”, or the act of pulling together lots of sources of information about a company to establish a coherent and accurate view of it. You can see the detailed checklist here.
As we’ve discussed here, he argued that there were only three reasons to sell:
- If you have made a serious mistake in your assessment of the company
- If the company no longer passes the 15 tests as clearly as it did before
- If you could reinvest your money in another, far more attractive company. But before you do this, you must be very sure of your reasoning.
How the Screen Works
While there is a strong qualitative element to Fisher’s investment thesis, it is possible to screen for the growth characteristics that are so vital to his strategy. At Stockopedia, we have modelled the screen using the following criteria:
- Sales 5y CAGR % > Median
- Sales Growth Streak > 2
- Net Margin % > Median
- Price/Earnings/Growth rate (PEG) (5y Growth) < 0.5
Clearly, this screen does not factor in important factors from the Checklist like whether there is a good level of motivation and a good working relationship among the management team, which would require further qualitative analysis.
Can the Fisher Approach Beat the Market?
We’ve not seen a comprehensive track record for Fisher over the course of his lengthy investing career. His approach to investing, and selling in particular, meant that he was happy to buy and hold stock through economic cycles. Indeed, his most famous investment was stock in Motorola, which he acquired in 1955 and held until his death, during which time the shares grew 20-fold.
According to AAII, stocks passing an interpretation of the Fisher screen tracked between January 1998 to August 2008, produced price gain returns that outpaced the S&P 500 – the Fisher screen gained 133.5% while the S&P 500 grew by 32.2%. Over 10 complete calendar years, the screen saw an equal number of up years as down.
In our own modelling, in the year to date, the Philip Fisher screen has delivered a return of 26.5%. Over the past six months it has returned 8.05% versus 0.31% for the FTSE 100.
From the Source
Fisher was quite secretive and gave very few interviews during his career. It wasn’t until the publication of Common Stocks and Uncommon Profits that the success of his investment strategy came to public attention. It was the first investment book ever to make the New York Times bestseller list.
As a reminder, you can take a free two-week trial of the Stockopedia Premium screener here.