Great Investors: the Philip Fisher approach

Lessons from the ‘Godfather of Growth’

In this series, 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.

Previously, 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.

Reading 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 favourable, Fisher sought to fill in any gaps in his knowledge by using a checklist of 15 questions:

  1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
  2. 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?
  3. How effective are the company’s research and development efforts in relation to its size?
  4. Does the company have an above-average sales organisation?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margins?
  7. Does the company have outstanding labour and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10. How good are the company’s cost analysis and accounting controls?
  11. 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?
  12. Does the company have a short-range or long-range outlook in regard to profits?
  13. 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?
  14. Does the management talk freely to investors about its affairs when things are going well but ‘clam up’ when troubles or disappointments occur?
  15. 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%. Out of 2000+ listed stocks on the ASX, just the following 11 stocks made it through the filter.

Company Market Cap Share Price Sales Growth (%) Earnings Growth (%) P/E
Australian Agricultural Company Limited (ASX:AAC)

372m

1.19

38.9

345.5

24.8

BC Iron Limited(ASX:BCI)

268m

2.58

5,361.7

243.7

46.3

Campbell Brothers Limited(ASX:CPB)

3,880m

57.42

26.4

51.4

22.7

Carsales.com Limited(ASX:CRZ)

1,270m

5.45

22.4

20.5

20.2

Empired Ltd(ASX:EPD)

12m

0.25

64.0

313.5

26.2

Little World Beverages Limited (ASX:LWB)

238m

3.65

20.1

36.7

23.0

Magellan Financial Group LLC (ASX:MFG)

300m

1.97

80.2

105.7

34.4

REA Group Limited(ASX:REA)

1,800m

13.67

19.3

30.1

22.8

Regis Resources Limited(ASX:RRL)

1,750m

3.89

250.7

390.5

28.5

Southern Cross Electrical Engineering Limited (ASX:SXE)

187m

1.16

31.5

1,137.9

20.7

Transurban Group(ASX:TCL)

8,200m

5.65

34.2

47.2

64.0

Source: CapitalIQ & Google Finance

I’ll have to leave you to do the scuttlebutt and 15-point checklist if any of them grab your interest! Of course, just passing a screen isn’t enough to buy the shares – but a good place to begin further research.

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 in the next article in this series.

If you’re in the market for some less risky, high yielding ASX shares, look no further than Secure Your Future with 3 Rock-Solid Dividend Stocks. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool contributor Mike King doesn’t own shares in any companies mentioned. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691).Authorised by Bruce Jackson.

A version of this article, written by G A Chester, originally appeared on fool.co.uk

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

The share price of ASX infant products retailer Baby Bunting Group Ltd (ASX:BBN) has been a solid performer so far …

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

A new landmark report by the Intergovernmental Panel on Climate Change (IPCC) was released earlier this week. It provided a …

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest …

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos Limited (ASX: AMS) share price has been on a tear this past week, rising 15% on the back …

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

Online furniture retailer Temple & Webster Group Ltd (ASX: TPW) had a breakout year in 2020, moving from relative obscurity …

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

Shares in ASX healthcare company Polynovo Limited (ASX: PNV) almost doubled in price last year. And, despite a shaky start …

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

Investing in other geographic markets has become a popular way to diversify a portfolio. The risks associated with being exposed …

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

Despite the News Corporation (ASX: NWS) share price getting a 31% bump between November last year and today, News Corp …

Read more »