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’ style investor so to try and get closer to the spirit of his qualitative approach, we have selected a handful of the stocks that seem most likely to have caught his attention.
Among the industrial companies qualifying for the screen is Weir (LON:WEIR), the engineering group that works in the minerals, oil & gas and power markets. Shares in Weir were knocked during the market-wide collapse in September 2008 but they rebounded quickly and have since soared – rising from 780p to 1877p since the start of 2010. In 2011, the group achieved its plan of doubling 2009 profits – three years earlier than it originally expected. In part, this growth rate is down to generally strong conditions in its end markets. While it isn’t immune from uncertainty in some markets, Weir’s diversified operations appear to offer a degree of comfort.
Another stock gracing the screen is BTG (LON:BTG), the FTSE 250 pharma group, which has been attracting forecast upgrades from brokers recently. BTG is due to publish its interim figures within days, however, last year’s numbers saw some substantial revenue and profit uplift as a result of a strategy to begin direct sales of its treatments in the US. Fisher would have liked that focus on sales. His interest in R&D development (BTG claims a decent pipeline of potential new products) and strong profit margins, also go in the company’s favour. BTG’s P/E ratio of 27.3 is well above average for the sector, but that wouldn’t necessarily have deterred Fisher who tended to prioritise growth potential over price.
Among the largest companies qualifying for the Fisher screen (the largest is telecoms giant Vodafone) is oilfield services group Petrofac (LON:PFC). Petrofac is involved in delivering oil and gas projects all over the world and had an order backlog at the end of September of US$9.4 billion. The company’s five-year growth indicators are well above average and despite its size it has set out a medium-term strategy of more than doubling recurring 2010 group earnings by 2015. In 2012 net profits are expected to grow by at least 15%. As an aside, income investors might also be interested to see that Petrofac has a strong and well-covered dividend growth record although this was not a key focus for Fisher.
Finally, at the smaller end of the spectrum, AIM-quoted Advanced Medical Solutions (LON:AMS) also makes it on to the Fisher screen thanks to its impressive growth record. AMS is a woundcare specialist with products including LiquiBand, which is growing its market share in the US, and ActivHeal, which is performing strongly in the UK. The company also claims to have a number of developments in its R&D pipeline. The shares jumped from 27p in November 2009 to a high of over 93p at the start of 2012. The price has since slipped but AMS’s confidence about the future appears to be fully intact.
Going for growth
Fisher’s focus on future growth proved to be a successful approach for his clients during his years as an investment manager. While synthesising all of his qualitative requirements in a quant screen is probably impossible, looking for companies with strong growth records has nevertheless produced a strategy that has trounced the market in the year to date.
While not all the companies on this screen conform to Fisher’s preferred sector focus, we've highlighted a few companies above that feel most Fisher-esque to us and it will be interesting to see how their performance compares to the screen overall (better or worse!). Of course, the always advisable instruction to DYOR (do your own research) is especially relevant in this case, given the number of soft qualitative factors in the Fisher checklist. We welcome any comments on these highlighted stocks (or the overall Fisher list) below.
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