Saturday, July 16, 2011

Philip A. Fisher’s Method on Finding Growth Stocks

In Common Stocks and Uncommon Profits, Philip Fisher illustrated his method of finding growth stocks.

Step 1
Listen to investment men with great ability as a source of original leads on what to investigate. Typical public printed brokerage bulletin available to everyone is not a fertile source. Few hours conversation, with and outstanding investment man, occasionally with a business executives or scientist, would lead to a decision that a particular company might be exciting.

Step 2
He didn’t approach anyone in the management in this stage. He didn’t spend hours and hours going over old annual reports and making minutes studies of minor year-by-year balance sheet changes. He didn’t ask every stockbroker he knew what he thinks of the stock.

He would glance over
a. The balance sheets to determine general nature of the capitalization and financial positions.
b. Breakdown of total sales by product line
c. Competitions
d. Shareholdings
e. All earnings statement figures throwing light on depreciation, profit margins, extent of research activity and abnormal or non-recurring costs in prior years’ operations

Step 3
Using “scuttlebutt” method, he would try to see every key customer, supplier, competitor, ex-employee or scientist in a related field that he knew or whom he could approach through mutual friends.

If he did not know enough of people that could lead to such background information, he would stop and do something else.

He would go through commercial bankers to those businessmen who have the information.

“Scuttlebutt” method
This method provides the clues that are needed to find really outstanding investments.
Ask the
a. Competitors
b. Researchers of the competitors, government, universities, etc.
c. Vendors
d. Customers
e. Executives of trade association
f. Former employees

Step 4
He would gather at least 50% of all the knowledge he would need to make the investment before approaching the management.

He would choose to see the man who make the decisions, not the financial public relations officer. It is wise and important to go to considerable trouble to be introduced to a management by the right people, ie. key customers, major shareholders, investment banking connections, etc.

He bought one out of two or two-and- a-half companies he visited. He had done his scuttlebutt work well enough to be very certain even before he visited the company. Meeting management was merely to confirm hopes or to ease fears by answers that make sense.

“One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head. Perhaps Shakespeare unintentionally summarized the process of successful common stock investment: There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” – Philip A Fisher

Summary of Common Stocks and Uncommon Profits
by Philip A. Fisher
  1. What to buy? Stocks selection criteria
  2. When to buy, when to sell and when NOT to sell?
  3. Ten Don'ts for investors
  4. Further explanations: Dividend
  5. How to find growth stocks?