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Subject: Re: [CANSLIM] Stock Strategies
Date: Mon, 08 Jul 2002 12:44:09 -0500
Next Article (by Subject): Re: [CANSLIM] Which Stock Strategies Did Best? A Mid-Year Performance Review Gene Ricci
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This is a multi-part message in MIME format. - ------=_NextPart_000_028F_01C2267D.278A2E90 Content-Type: text/plain; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable Winston, here is what I could find: The Fisher Approach to Stock Investing=20 - -------------------------------------------------------------------------= - ------- Finding Bonanza Stocks=20 Investment approaches are often categorized as being either growth or = value oriented. William O'Neil's C-A-N-S-L-I-M system focuses = exclusively on smaller, market-leading companies, with accelerating = earnings growth and price momentum. O'Neil shows little concern over = buying a stock with a rich price-earnings multiple, and feels that = market timing is an important element to a successful approach to = investing.=20 On the other hand, the Benjamin Graham approaches focus on trying to buy = a dollar's worth of stock for 50 cents. Graham's stock selection = technique places an emphasis on locating financially sound stocks with = reasonable prices compared to asset values and earnings levels. While = earnings and dividend growth were an important consideration for Graham, = earnings stability was emphasized over eye-popping earnings growth.=20 Fisher received his professional start in the financial markets in 1928 = as a "statistician" for a bank underwriting securities. The norm at that = time was highly margined investments in speculative issues without = investor research or knowledge of the business. Even Fisher lost a = significant amount of money in the 1929 crash by investing in a few = stocks that still looked cheap because of their low price-earnings = ratios, though his analysis of the market identified it to be highly = risky and ready for the "greatest bear market in a quarter of a = century."=20 In his writings, Fisher relates that with the sour feeling toward the = investment community after the market crash, the term statistician fell = out of favor and was replaced with security analyst. Fisher started his = investment counseling firm in the early 1930s with the investment = philosophy of selecting deeply researched companies with strong = long-term growth prospects and holding them through the gyrations of the = economic cycle. Fisher favored buying and holding the stocks of = companies that were well-positioned for long-term growth in sales and = profits. This positioning could best be determined by examining factors = that are difficult to measure through ratios and other mathematical = formulations--the quality of management, the potential for future = long-term sales growth, and the firm's competitive edge.=20 Fisher's investment philosophy and its development is revealed in his = collection of writings "Common Stocks and Uncommon Profits," published = in the late 1950s, "Conservative Investors Sleep Well," published in the = mid 1970s and "Developing an Investment Philosophy," published in the = early 1980s. All three works have been republished by John Wiley & Sons = in "Common Stocks and Uncommon Profits and Other Writings by Philip A. = Fisher." ($19.95; John Wiley & Sons, 1 Wiley Drive, Somerset, N.J. = 08875; 800/225-5945) These writings serve as the basis of this article = and provide an interesting perspective on the evolution of the = investment philosophy of a successful money manager who knows how to = learn from his mistakes.=20 Identifying Growth Stocks Much of the material in Fisher's book deals with the qualitative aspects = of selecting securities. Fisher admits to relying on the recommendations = of respected investment advisers as the preliminary screen for = four-fifths of his investment ideas. (The other fifth comes from = industry scuttlebutt.) These preliminary lists would always be followed = up with in-depth research. Fortunately, Fisher's writings provide enough = detail for the investor to establish some basic screens that highlight = growth stocks meriting further in-depth analysis.=20 Growth Stocks: The Overall Philosophy Fisher first and foremost was a growth stock investor. He felt the = greatest investment returns did not come from the purchase of stocks = that were undervalued, since even a stock that is undervalued by as much = as 50% would only double in price once it reached fair market value. = Instead, he sought much higher returns from those companies that could = achieve growth in sales and profits greater than the overall market over = a long period of time. On the other hand, once those companies were = found, he favored buying them opportunistically, either when the market = temporarily undervalues the company due to unexpected bad news, or when = the overall markets are depressed.=20 Fisher did not seek companies that showed promise of short-term growth = due to cyclical events or one-time factors, feeling that the timing was = too risky and the promised returns too small. Instead, he focused on = long-term growth, which he felt could only come from companies that were = strong in three "dimensions":=20 a.. The company is producing goods or services with the potential for = future long-term sales,=20 b.. The company has special characteristics that will allow it to = retain a favorable competitive edge over existing competitors and = newcomers, and=20 c.. The company has excellent management with both a determination to = grow the company, and the ability to implement its plans.=20 True long-term growth companies, he felt, were not necessarily small and = relatively young firms, although he did not exclude these companies (as = long as they had some operating history upon which he could judge-he did = not favor new firms). On the other hand, he noted that the qualities = that constitute excellent management vary considerably based on firm = size.=20 Functional factors:=20 1.. Is the company providing a product or service that has sufficient = market potential for a sizable increase in sales for several years? In = this instance, Fisher is discussing sales over the long-term, and warns = against firms that may show spurts due to one-time factors. On the other = hand, he notes that the problems of marketing new products often causes = sales increases to come in a series of uneven spurts rather than a = smooth progression, and suggests judging sales growth over a series of = years rather than single years.=20 2.. Does the company have superiority in production--is it the = lowest-cost producer (for manufacturing firms) or have the lowest-cost = operations (for service firms or retailers)? Low production costs will = allow a company to survive during hard times when higher-cost = competitors are weeded out, he notes. In addition, low-cost producers = are better able to build funds internally for future growth.=20 3.. Does the company have a strong marketing organization? Fisher's = definition of a strong market organization is broad, and includes the = ability to recognize changes in public tastes, an effective advertising = effort, and an efficient product distribution system.=20 4.. Does the company have outstanding research and development = efforts? Fisher was a strong believer in research efforts to produce new = and better products in a better way or at lower cost. Sometimes, he = noted, these efforts would even lead to new lines of business. He = suggested examining the amount expended on research relative to its = size, but warned against simple comparisons among companies because of = differences in what is included in reported research and development = figures. Fisher was also concerned about the effectiveness of a firm's = research effort indicated by its ability to bring research ideas to = production and eventually to market--that is, its teamwork with the = other parts of the firm. The most important question, he said, is how = much in net profits over the past 10 years has been a result of research = efforts? Firms that have done well in this regard in the past, he said, = will most likely do so in the future.=20 5.. How effective is the company's cost analysis and accounting = controls? Good management and the efficient use of resources can only = come from good information, according to Fisher. In addition, the = finance function should provide an early-warning system for problems = that could affect profitability.=20 6.. Does the company have financial strength? Fisher was concerned = here with a firm's ability to finance growth without the need to use = equity financing, since increasing the number of shares outstanding = would dilute an existing shareholder's benefits of investing in the = firm.=20 Excellence in management and labor relations:=20 7.. Does management have the determination, leadership and skills = necessary to continue to develop products or services that will further = increase sales? Fisher strongly believed that good management was key to = long-term growth--by spotting new opportunities, adapting to changing = market environments, developing plans, and coordinating the efforts of = the organization to carry out those plans.=20 8.. Is there a good working relationship among the management team? = Fisher felt that good teamwork was crucial among the major divisions, = and that this was best fostered by a strong effort to develop and = promote its managers from within the organization.=20 9.. Does the company have enough depth to its management? Even smaller = firms, Fisher noted, need enough depth in management to prevent a = "corporate disaster" should something happen to the key person.=20 10.. Does the company have good labor relations? Fisher felt that the = entrepreneurial atmosphere and teamwork within a firm should permeate = through all aspects of a company, including rank and file workers. = Mediocre relations, he stated, tend to produce high labor turnover and = greater costs in training new workers.=20 11.. Does management have a sufficiently long-range outlook? Fisher = noted that long-term growth sometimes comes at the expense of short-term = profits, and managements that are unwilling to forego current profits = can hurt the future growth of a firm.=20 12.. Does the firm practice good investor relations? To Fisher, good = investor relations mean a management that is willing to be honest and = forthcoming when troubles and disappointments arise. Evasions, he = stated, tend to be a sign of weak management--either they do not have a = plan to deal with an unexpected difficulty, or they do not have a sense = of responsibility toward shareholders.=20 13.. Does the management have unquestionable integrity? "The = management of a company is always far closer to its assets than is the = stockholder," Fisher states. And managers can benefit themselves at the = expense of shareholders in an "infinite" number of ways, including = salaries and perks high above the norm. The only protection shareholders = have against management abuses of position is to invest in companies = whose managers have unquestioned integrity.=20 Business characteristics=20 14.. Does the firm have above-average profitability? In a rare = instance, Fisher actually suggests a mathematical comparison--profit = margins per dollar of sales, compared against similar firms in the same = industry. Older and larger firms should have among the best figures in = their industry, he states. On the other hand, younger firms may elect to = speed up growth by spending all or a large part of profits on research = or sales; for these firms, Fisher suggested that investors make sure = that narrow profit margins are due to spending in these areas alone. = Firms operating in areas with high profits will attract competition, but = operating at extremely high efficiency levels will reduce the incentive = for competitors to enter the market.=20 15.. Is there some aspect to the business that will allow the company = to keep its relative competitive edge? Innovations, special skills or = services, patent protections and similar advantages give companies a = strong ability to fend off competitors or newcomers to the area.=20 Screening Using the Fisher Approach=20 While Fisher feels that his growth stock techniques can be applied to = any industry, he confines his research to manufacturing companies = because he understands their characteristics. This is a principle heard = repeatedly from successful investors--limit your analysis to industries = that you understand well and where you possess some competitive = advantage compared to other investors. Fisher looks at manufacturing = companies that use leading-edge technology and are headed by management = with a superior business judgment. For our screen we do not limit the = search to any specific industry. However, an investor considering the = incorporation of the Fisher approach into their own style would be wise = to make a realistic appraisal of the industries in which they should = consider investing directly.=20 Fisher does not limit his search to companies of any specific size. In = his first work, written in a pre-Nasdaq era, he even made the argument = that investors should not rule out over-the-counter securities. However, = Fisher favored seasoned companies with a measurable track record run by = an experienced management team over a fresh initial public offering.=20 Fisher did warn his readers that extra care was required when investing = in smaller firms with higher growth potential. Fisher compared investing = in small-capitalization stocks to driving a car above normal speeds. A = driver may get where he wants to go faster, but a higher level of = alertness and vigilance is required or the driver risks not getting = there at all. Fisher also suggested that if investors are seeking out = smaller firms, they should consider spreading out their investments = across a wider range of companies.=20 Diversification Notes Fisher said that it was important to have some level of diversification, = but he felt that many investors had a tendency to be over-diversified. = It's easy to understand the wisdom of not putting all eggs in one = basket. But toss too many eggs into too many baskets and you risk ending = up with baskets that are not attractive and are difficult to watch. = Fisher joked that diversification may be so popular because it is a = simple concept that even stockbrokers can understand.=20 Fisher felt that the size and quality of the companies used in = constructing a portfolio determined the optimal balance between risk and = return. Smaller and riskier firms require more diversification. A 10% to = 20% portfolio position may be optimal for the stock of a larger, more = stable firm. With smaller, riskier firms a 5% portfolio position may be = more appropriate. Fisher believed that there are a relatively small = number of truly outstanding companies, so investors should limit their = investments to the most desirable opportunities. Fisher also advised a = limit of 20 securities to a portfolio-he considered a long list of = securities a sign of an investor who is unsure of himself.=20 Competitive Advantage The qualitative factors Fisher focused on requires detailed analysis to = determine whether a company is positioned for long-term growth. The = challenge for an investor is coming up with a list of stocks that merit = this type of in-depth analysis. Fisher was seeking companies with = inherent characteristics that should lead to above-average profitability = over the long term. He preferred to use profit margin, which compares = net income versus sales, to identify companies with strong competitive = positions because it is more reliable when comparing companies than = measures such as return on assets. Return on assets can be easily = distorted by factors such as uneven age and historical cost of assets.=20 However, care must also be taken when comparing companies by profit = margin. It proves most useful when comparing firms in the same industry. = Industries with commodity items and high turnover typically have a lower = profit margin. Firms with more specialized niche products usually have a = higher margin, but lower turnover. Profit margin screens should be = tailored to compare companies in very similar lines of work if you wish = to identify truly outstanding companies.=20 Our first screen specifies that profit margins should be above industry = norms for each of the last five fiscal years and the most recent 12 = months. AAII's Stock Investor is used to perform the screen. Beyond = looking at any one year, it is important to examine the profit margin = over time. All of the firms in the screen have exceeded their respective = industry norms for each of the last five years. A long string of strong = margins may indicate a company that has a competitive advantage the = company is somehow protecting. Fisher likened a high profit margin to an = open jar of honey that attracts a swarm of angry insects bent on = devouring it.=20 Fisher believed that there are two primary avenues for a company to = protect an above-average margin-establish a monopoly or become a = dominant low-cost producer. The only real growth monopoly opportunities = in the U.S. are found in companies that have some patent protection = preventing competitors from exactly copying some product or technology. = These opportunities are rare and usually short-lived. Fisher preferred = to concentrate on firms that have established themselves as the clear = market leaders, are low-cost producers, and are in an industry segment = where success depends on the interplay of many unique disciplines. = Low-cost producers are better positioned to weather economic slowdowns = and generate more funds internally for expansion and research. When = looking at companies from this perspective, Fisher always asked what the = company was doing that could not be duplicated well by others.=20 Consistent Sales Growth Our next screen looks at the historical sales record. Fisher preferred = to invest in companies that showed consistent strong and steady growth = over firms that showed great variability. For our screen we look for = positive sales growth for each of the last three fiscal periods and made = sure that sales have not slowed down over the last 12 months compared to = the last fiscal year. Run by itself, this filter would exclude about = half the companies in Stock Investor. We also screen for firms growing = faster than their industry, indicating a potential competitive = advantage.=20 Dividend Payments Fisher felt that investors looking for companies with maximum potential = for capital gains should confine their investments to those paying a low = dividend or not paying a dividend at all and also having strong earnings = power and attractive places to reinvest their earnings. Fisher looked = for companies with sufficient capital to take care of needs to exploit = prospects for the next several years without raising new capital.=20 We specify that firms should not pay any dividends. We decided to be = fairly restrictive in our screen--alternative, less-restrictive screens = might look for low dividend yields or low dividend payout ratios.=20 A Great Firm at a Great Price In his early work, Fisher explained the desirability of pursuing a = long-term growth strategy and detailed the company characteristics to = look for to identify strong growth opportunities. His later work = reinforced this growth message, but also emphasized the advantages of = buying these firms when they are out of favor.=20 As Fisher discovered early in his career, a company with a low = price-earnings ratio may be a trap or a bargain. A low price-earnings = ratio does not by itself guarantee anything. It may be a warning = indicator of weakness in the company or industry. However, the best = opportunity for extraordinary profits occurs when a company's shares are = mispriced because of general market conditions or misconceptions of the = true worth of the stock. A high growth rate in earnings coupled with an = expansion in the price-earnings ratio is every growth investor's goal.=20 Fisher believed that the only value in looking at historical = price-earnings ratios was to help gain a perspective on the base = valuation over time. The key was looking forward and anticipating future = earnings growth. Comparing the price-earnings ratio to the earnings = growth is a common valuation technique. Companies with higher expected = earnings growth should trade with higher price-earnings ratios. Stocks = with a price-earnings ratio half the level of the earnings growth are = considered attractive.=20 For the Fisher screen, we construct our price-earnings to earnings = growth ratio using expected earnings for the next fiscal year for the = price-earnings ratio, which is often termed the forward price-earnings = ratio, and the expected long-term growth rate in earnings. Stock = Investor has consensus earnings estimates collected by I/B/E/S. Our = final screen looks for companies with a price-earnings to earnings = growth ratio less than or equal to one half.=20 The companies passing all of the Fisher criteria are shown in Table 1. = They may represent golden opportunities or traps. But this is only the = first step in the investment process. Our goal with the screen was to = perform a basic filter that identified companies worthy of study using = Fisher's 15 qualitative factors.=20 Stock Monitoring and When to Sell Fisher provided a number of helpful rules both for purchasing and = selling.=20 For stock purchases, Fisher warned against agonizing over eighths and = quarters when placing a trade. Attempting to shave points off the price, = he noted, often results in a trade not going through, and the investor = loses out on investing long term in an outstanding firm. And any = savings, he pointed out, will be insignificant compared to long-term = returns.=20 Fisher was a strong advocate of long-term investing, advising investors = to hold onto their stocks until there is a fundamental change in the = firm's nature, or it has grown to a point where it will no longer be = growing faster than the overall economy. He warned, however, that when = companies grow, management need to change and adapt, and investors may = need to sell if management doesn't keep pace. Fisher recommended against = selling for short-term reasons-for example, to take profits if a = temporary downturn is expected.=20 Fisher suggested that investors use a three-year rule for judging = results if a stock is underperforming the market but nothing else has = happened to change the investor's original view. If after three years it = is still underperforming, he recommended that investors sell the stock.=20 On the other hand, Fisher advised selling "mistakes" quickly, once they = are recognized.=20 Lastly, Fisher warned against overdiversification, which he felt caused = investors to lower their standards and to put money in companies in = which they do not thoroughly understand. Sufficient diversification, he = said, would be an investment in 10 or 12 larger companies in a variety = of industries with different characteristics, and any holding of over 20 = companies is probably too much.=20 ----- Original Message -----=20 From: Winston Little=20 To: canslim@lists.xmission.com=20 Sent: Monday, July 08, 2002 12:18 PM Subject: [CANSLIM] Stock Strategies Very interesting data. Does anyone know a general description of what method Philip Fisher = uses? I believe that he advertizes on the IBD web site. - ------=_NextPart_000_028F_01C2267D.278A2E90 Content-Type: text/html; charset="iso-8859-1" Content-Transfer-Encoding: quoted-printable <!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.0 Transitional//EN"> <HTML><HEAD> <META http-equiv=3DContent-Type content=3D"text/html; = charset=3Diso-8859-1"> <META content=3D"MSHTML 5.50.4916.2300" name=3DGENERATOR> <STYLE></STYLE> </HEAD> <BODY bgColor=3D#ffffff> <DIV><FONT face=3D"Comic Sans MS">Winston, here is what I could = find:</FONT></DIV> <DIV><FONT face=3D"Comic Sans MS"></FONT> </DIV> <DIV align=3Dcenter> <H1><FONT color=3D#005263>The Fisher Approach to Stock Investing</FONT>=20 </FONT></H1></DIV> <HR color=3D#005263> <P><FONT face=3DVerdana color=3D#005263><B>Finding Bonanza = Stocks</B></FONT>=20 <P><SPAN class=3Dcontent><FONT color=3D#005263><B><FONT=20 size=3D+1>I</FONT></B></FONT>nvestment approaches are often categorized = as being=20 either growth or value oriented. William O'Neil's C-A-N-S-L-I-M system = focuses=20 exclusively on smaller, market-leading companies, with accelerating = earnings=20 growth and price momentum. O'Neil shows little concern over buying a = stock with=20 a rich price-earnings multiple, and feels that market timing is an = important=20 element to a successful approach to investing.=20 <P>On the other hand, the Benjamin Graham approaches focus on trying to = buy a=20 dollar's worth of stock for 50 cents. Graham's stock selection technique = places=20 an emphasis on locating financially sound stocks with reasonable prices = compared=20 to asset values and earnings levels. While earnings and dividend growth = were an=20 important consideration for Graham, earnings stability was emphasized = over=20 eye-popping earnings growth.=20 <P>Fisher received his professional start in the financial markets in = 1928 as a=20 "statistician" for a bank underwriting securities. The norm at that time = was=20 highly margined investments in speculative issues without investor = research or=20 knowledge of the business. Even Fisher lost a significant amount of = money in the=20 1929 crash by investing in a few stocks that still looked cheap because = of their=20 low price-earnings ratios, though his analysis of the market identified = it to be=20 highly risky and ready for the "greatest bear market in a quarter of a = century."=20 <P>In his writings, Fisher relates that with the sour feeling toward the = investment community after the market crash, the term statistician fell = out of=20 favor and was replaced with security analyst. Fisher started his = investment=20 counseling firm in the early 1930s with the investment philosophy of = selecting=20 deeply researched companies with strong long-term growth prospects and = holding=20 them through the gyrations of the economic cycle. Fisher favored buying = and=20 holding the stocks of companies that were well-positioned for long-term = growth=20 in sales and profits. This positioning could best be determined by = examining=20 factors that are difficult to measure through ratios and other = mathematical=20 formulations--the quality of management, the potential for future = long-term=20 sales growth, and the firm's competitive edge.=20 <P>Fisher's investment philosophy and its development is revealed in his = collection of writings "Common Stocks and Uncommon Profits," published = in the=20 late 1950s, "Conservative Investors Sleep Well," published in the mid = 1970s and=20 "Developing an Investment Philosophy," published in the early 1980s. All = three=20 works have been republished by John Wiley & Sons in "Common Stocks = and=20 Uncommon Profits and Other Writings by Philip A. Fisher." ($19.95; John = Wiley=20 & Sons, 1 Wiley Drive, Somerset, N.J. 08875; 800/225-5945) These = writings=20 serve as the basis of this article and provide an interesting = perspective on the=20 evolution of the investment philosophy of a successful money manager who = knows=20 how to learn from his mistakes.=20 <H2><FONT color=3D#005263>Identifying Growth Stocks</FONT></H2> <DIV>Much of the material in Fisher's book deals with the qualitative = aspects of=20 selecting securities. Fisher admits to relying on the recommendations of = respected investment advisers as the preliminary screen for four-fifths = of his=20 investment ideas. (The other fifth comes from industry scuttlebutt.) = These=20 preliminary lists would always be followed up with in-depth research.=20 Fortunately, Fisher's writings provide enough detail for the investor to = establish some basic screens that highlight growth stocks meriting = further=20 in-depth analysis. </DIV> <H2><FONT color=3D#005263>Growth Stocks: The Overall = Philosophy</FONT></H2> <DIV>Fisher first and foremost was a growth stock investor. He felt the = greatest=20 investment returns did not come from the purchase of stocks that were=20 undervalued, since even a stock that is undervalued by as much as 50% = would only=20 double in price once it reached fair market value. Instead, he sought = much=20 higher returns from those companies that could achieve growth in sales = and=20 profits greater than the overall market over a long period of time. On = the other=20 hand, once those companies were found, he favored buying them = opportunistically,=20 either when the market temporarily undervalues the company due to = unexpected bad=20 news, or when the overall markets are depressed. </DIV> <P>Fisher did not seek companies that showed promise of short-term = growth due to=20 cyclical events or one-time factors, feeling that the timing was too = risky and=20 the promised returns too small. Instead, he focused on long-term growth, = which=20 he felt could only come from companies that were strong in three = "dimensions":=20 <P> <UL> <LI>The company is producing goods or services with the potential for = future=20 long-term sales,=20 <P></P> <LI>The company has special characteristics that will allow it to = retain a=20 favorable competitive edge over existing competitors and newcomers, = and=20 <P></P> <LI>The company has excellent management with both a determination to = grow the=20 company, and the ability to implement its plans. </LI></UL> <P>True long-term growth companies, he felt, were not necessarily small = and=20 relatively young firms, although he did not exclude these companies (as = long as=20 they had some operating history upon which he could judge=97he did not = favor new=20 firms). On the other hand, he noted that the qualities that constitute = excellent=20 management vary considerably based on firm size.=20 <P> <DIV><STRONG><FONT color=3D#005263>Functional factors:</FONT></STRONG> = </DIV> <OL> <LI>Is the company providing a product or service that has sufficient = market=20 potential for a sizable increase in sales for several years? In this = instance,=20 Fisher is discussing sales over the long-term, and warns against firms = that=20 may show spurts due to one-time factors. On the other hand, he notes = that the=20 problems of marketing new products often causes sales increases to = come in a=20 series of uneven spurts rather than a smooth progression, and suggests = judging=20 sales growth over a series of years rather than single years.=20 <LI>Does the company have superiority in production--is it the = lowest-cost=20 producer (for manufacturing firms) or have the lowest-cost operations = (for=20 service firms or retailers)? Low production costs will allow a company = to=20 survive during hard times when higher-cost competitors are weeded out, = he=20 notes. In addition, low-cost producers are better able to build funds=20 internally for future growth.=20 <LI>Does the company have a strong marketing organization? Fisher's = definition=20 of a strong market organization is broad, and includes the ability to=20 recognize changes in public tastes, an effective advertising effort, = and an=20 efficient product distribution system.=20 <LI>Does the company have outstanding research and development = efforts? Fisher=20 was a strong believer in research efforts to produce new and better = products=20 in a better way or at lower cost. Sometimes, he noted, these efforts = would=20 even lead to new lines of business. He suggested examining the amount = expended=20 on research relative to its size, but warned against simple = comparisons among=20 companies because of differences in what is included in reported = research and=20 development figures. Fisher was also concerned about the effectiveness = of a=20 firm's research effort indicated by its ability to bring research = ideas to=20 production and eventually to market--that is, its teamwork with the = other=20 parts of the firm. The most important question, he said, is how much = in net=20 profits over the past 10 years has been a result of research efforts? = Firms=20 that have done well in this regard in the past, he said, will most = likely do=20 so in the future.=20 <LI>How effective is the company's cost analysis and accounting = controls? Good=20 management and the efficient use of resources can only come from good=20 information, according to Fisher. In addition, the finance function = should=20 provide an early-warning system for problems that could affect = profitability.=20 <LI>Does the company have financial strength? Fisher was concerned = here with a=20 firm's ability to finance growth without the need to use equity = financing,=20 since increasing the number of shares outstanding would dilute an = existing=20 shareholder's benefits of investing in the firm.=20 <P><B><FONT color=3D#005263>Excellence in management and labor=20 relations:</FONT></B> </P> <LI>Does management have the determination, leadership and skills = necessary to=20 continue to develop products or services that will further increase = sales?=20 Fisher strongly believed that good management was key to long-term = growth--by=20 spotting new opportunities, adapting to changing market environments,=20 developing plans, and coordinating the efforts of the organization to = carry=20 out those plans.=20 <LI>Is there a good working relationship among the management team? = Fisher=20 felt that good teamwork was crucial among the major divisions, and = that this=20 was best fostered by a strong effort to develop and promote its = managers from=20 within the organization.=20 <LI>Does the company have enough depth to its management? Even smaller = firms,=20 Fisher noted, need enough depth in management to prevent a "corporate=20 disaster" should something happen to the key person.=20 <LI>Does the company have good labor relations? Fisher felt that the=20 entrepreneurial atmosphere and teamwork within a firm should permeate = through=20 all aspects of a company, including rank and file workers. Mediocre = relations,=20 he stated, tend to produce high labor turnover and greater costs in = training=20 new workers.=20 <LI>Does management have a sufficiently long-range outlook? Fisher = noted that=20 long-term growth sometimes comes at the expense of short-term profits, = and=20 managements that are unwilling to forego current profits can hurt the = future=20 growth of a firm.=20 <LI>Does the firm practice good investor relations? To Fisher, good = investor=20 relations mean a management that is willing to be honest and = forthcoming when=20 troubles and disappointments arise. Evasions, he stated, tend to be a = sign of=20 weak management--either they do not have a plan to deal with an = unexpected=20 difficulty, or they do not have a sense of responsibility toward = shareholders.=20 <LI>Does the management have unquestionable integrity? "The management = of a=20 company is always far closer to its assets than is the stockholder," = Fisher=20 states. And managers can benefit themselves at the expense of = shareholders in=20 an "infinite" number of ways, including salaries and perks high above = the=20 norm. The only protection shareholders have against management abuses = of=20 position is to invest in companies whose managers have unquestioned = integrity.=20 <P><B><FONT color=3D#005263>Business characteristics</FONT></B> </P> <LI>Does the firm have above-average profitability? In a rare = instance, Fisher=20 actually suggests a mathematical comparison--profit margins per dollar = of=20 sales, compared against similar firms in the same industry. Older and = larger=20 firms should have among the best figures in their industry, he states. = On the=20 other hand, younger firms may elect to speed up growth by spending all = or a=20 large part of profits on research or sales; for these firms, Fisher = suggested=20 that investors make sure that narrow profit margins are due to = spending in=20 these areas alone. Firms operating in areas with high profits will = attract=20 competition, but operating at extremely high efficiency levels will = reduce the=20 incentive for competitors to enter the market.=20 <LI>Is there some aspect to the business that will allow the company = to keep=20 its relative competitive edge? Innovations, special skills or = services, patent=20 protections and similar advantages give companies a strong ability to = fend off=20 competitors or newcomers to the area. </LI></OL> <DIV><FONT face=3D"Comic Sans MS"></FONT> </DIV> <DIV><STRONG><FONT face=3DVerdana color=3D#005263>Screening Using the = Fisher=20 Approach</FONT></STRONG>=20 <P><SPAN class=3Dcontent><FONT color=3D#005263><B><FONT=20 size=3D+1>W</FONT></B></FONT>hile Fisher feels that his growth stock = techniques=20 can be applied to any industry, he confines his research to = manufacturing=20 companies because he understands their characteristics. This is a = principle=20 heard repeatedly from successful investors--limit your analysis to = industries=20 that you understand well and where you possess some competitive = advantage=20 compared to other investors. Fisher looks at manufacturing companies = that use=20 leading-edge technology and are headed by management with a superior = business=20 judgment. For our screen we do not limit the search to any specific = industry.=20 However, an investor considering the incorporation of the Fisher = approach into=20 their own style would be wise to make a realistic appraisal of the = industries in=20 which they should consider investing directly.=20 <P>Fisher does not limit his search to companies of any specific size. = In his=20 first work, written in a pre-Nasdaq era, he even made the argument that=20 investors should not rule out over-the-counter securities. However, = Fisher=20 favored seasoned companies with a measurable track record run by an = experienced=20 management team over a fresh initial public offering.=20 <P>Fisher did warn his readers that extra care was required when = investing in=20 smaller firms with higher growth potential. Fisher compared investing in = small-capitalization stocks to driving a car above normal speeds. A = driver may=20 get where he wants to go faster, but a higher level of alertness and = vigilance=20 is required or the driver risks not getting there at all. Fisher also = suggested=20 that if investors are seeking out smaller firms, they should consider = spreading=20 out their investments across a wider range of companies.=20 <H2><FONT color=3D#005263>Diversification Notes</FONT></H2>Fisher said = that it was=20 important to have some level of diversification, but he felt that many = investors=20 had a tendency to be over-diversified. It's easy to understand the = wisdom of not=20 putting all eggs in one basket. But toss too many eggs into too many = baskets and=20 you risk ending up with baskets that are not attractive and are = difficult to=20 watch. Fisher joked that diversification may be so popular because it is = a=20 simple concept that even stockbrokers can understand.=20 <P>Fisher felt that the size and quality of the companies used in = constructing a=20 portfolio determined the optimal balance between risk and return. = Smaller and=20 riskier firms require more diversification. A 10% to 20% portfolio = position may=20 be optimal for the stock of a larger, more stable firm. With smaller, = riskier=20 firms a 5% portfolio position may be more appropriate. Fisher believed = that=20 there are a relatively small number of truly outstanding companies, so = investors=20 should limit their investments to the most desirable opportunities. = Fisher also=20 advised a limit of 20 securities to a portfolio=97he considered a long = list of=20 securities a sign of an investor who is unsure of himself.=20 <H2><FONT color=3D#005263>Competitive Advantage</FONT></H2>The = qualitative factors=20 Fisher focused on requires detailed analysis to determine whether a = company is=20 positioned for long-term growth. The challenge for an investor is coming = up with=20 a list of stocks that merit this type of in-depth analysis. Fisher was = seeking=20 companies with inherent characteristics that should lead to = above-average=20 profitability over the long term. He preferred to use profit margin, = which=20 compares net income versus sales, to identify companies with strong = competitive=20 positions because it is more reliable when comparing companies than = measures=20 such as return on assets. Return on assets can be easily distorted by = factors=20 such as uneven age and historical cost of assets.=20 <P>However, care must also be taken when comparing companies by profit = margin.=20 It proves most useful when comparing firms in the same industry. = Industries with=20 commodity items and high turnover typically have a lower profit margin. = Firms=20 with more specialized niche products usually have a higher margin, but = lower=20 turnover. Profit margin screens should be tailored to compare companies = in very=20 similar lines of work if you wish to identify truly outstanding = companies.=20 <P>Our first screen specifies that profit margins should be above = industry norms=20 for each of the last five fiscal years and the most recent 12 months. = AAII's=20 Stock Investor is used to perform the screen. Beyond looking at any one = year, it=20 is important to examine the profit margin over time. All of the firms in = the=20 screen have exceeded their respective industry norms for each of the = last five=20 years. A long string of strong margins may indicate a company that has a = competitive advantage the company is somehow protecting. Fisher likened = a high=20 profit margin to an open jar of honey that attracts a swarm of angry = insects=20 bent on devouring it.=20 <P>Fisher believed that there are two primary avenues for a company to = protect=20 an above-average margin=97establish a monopoly or become a dominant = low-cost=20 producer. The only real growth monopoly opportunities in the U.S. are = found in=20 companies that have some patent protection preventing competitors from = exactly=20 copying some product or technology. These opportunities are rare and = usually=20 short-lived. Fisher preferred to concentrate on firms that have = established=20 themselves as the clear market leaders, are low-cost producers, and are = in an=20 industry segment where success depends on the interplay of many unique=20 disciplines. Low-cost producers are better positioned to weather = economic=20 slowdowns and generate more funds internally for expansion and research. = When=20 looking at companies from this perspective, Fisher always asked what the = company=20 was doing that could not be duplicated well by others.=20 <H2><FONT color=3D#005263>Consistent Sales Growth</FONT></H2>Our next = screen looks=20 at the historical sales record. Fisher preferred to invest in companies = that=20 showed consistent strong and steady growth over firms that showed great=20 variability. For our screen we look for positive sales growth for each = of the=20 last three fiscal periods and made sure that sales have not slowed down = over the=20 last 12 months compared to the last fiscal year. Run by itself, this = filter=20 would exclude about half the companies in Stock Investor. We also screen = for=20 firms growing faster than their industry, indicating a potential = competitive=20 advantage.=20 <H2><FONT color=3D#005263>Dividend Payments</FONT></H2>Fisher felt that = investors=20 looking for companies with maximum potential for capital gains should = confine=20 their investments to those paying a low dividend or not paying a = dividend at all=20 and also having strong earnings power and attractive places to reinvest = their=20 earnings. Fisher looked for companies with sufficient capital to take = care of=20 needs to exploit prospects for the next several years without raising = new=20 capital.=20 <P>We specify that firms should not pay any dividends. We decided to be = fairly=20 restrictive in our screen--alternative, less-restrictive screens might = look for=20 low dividend yields or low dividend payout ratios.=20 <H2><FONT color=3D#005263>A Great Firm at a Great Price</FONT></H2>In = his early=20 work, Fisher explained the desirability of pursuing a long-term growth = strategy=20 and detailed the company characteristics to look for to identify strong = growth=20 opportunities. His later work reinforced this growth message, but also=20 emphasized the advantages of buying these firms when they are out of = favor.=20 <P>As Fisher discovered early in his career, a company with a low = price-earnings=20 ratio may be a trap or a bargain. A low price-earnings ratio does not by = itself=20 guarantee anything. It may be a warning indicator of weakness in the = company or=20 industry. However, the best opportunity for extraordinary profits occurs = when a=20 company's shares are mispriced because of general market conditions or=20 misconceptions of the true worth of the stock. A high growth rate in = earnings=20 coupled with an expansion in the price-earnings ratio is every growth = investor's=20 goal.=20 <P>Fisher believed that the only value in looking at historical = price-earnings=20 ratios was to help gain a perspective on the base valuation over time. = The key=20 was looking forward and anticipating future earnings growth. Comparing = the=20 price-earnings ratio to the earnings growth is a common valuation = technique.=20 Companies with higher expected earnings growth should trade with higher=20 price-earnings ratios. Stocks with a price-earnings ratio half the level = of the=20 earnings growth are considered attractive.=20 <P>For the Fisher screen, we construct our price-earnings to earnings = growth=20 ratio using expected earnings for the next fiscal year for the = price-earnings=20 ratio, which is often termed the forward price-earnings ratio, and the = expected=20 long-term growth rate in earnings. Stock Investor has consensus earnings = estimates collected by I/B/E/S. Our final screen looks for companies = with a=20 price-earnings to earnings growth ratio less than or equal to one half.=20 <P>The companies passing all of the Fisher criteria are shown in <A=20 href=3D"http://www.aaii.com/stkscrns/archive/fisher/fisherpc.shtml">Table= 1</A>.=20 They may represent golden opportunities or traps. But this is only the = first=20 step in the investment process. Our goal with the screen was to perform = a basic=20 filter that identified companies worthy of study using Fisher's 15 = qualitative=20 factors.=20 <H2><FONT color=3D#005263>Stock Monitoring and When to = Sell</FONT></H2>Fisher=20 provided a number of helpful rules both for purchasing and selling.=20 <P>For stock purchases, Fisher warned against agonizing over eighths and = quarters when placing a trade. Attempting to shave points off the price, = he=20 noted, often results in a trade not going through, and the investor = loses out on=20 investing long term in an outstanding firm. And any savings, he pointed = out,=20 will be insignificant compared to long-term returns.=20 <P>Fisher was a strong advocate of long-term investing, advising = investors to=20 hold onto their stocks until there is a fundamental change in the firm's = nature,=20 or it has grown to a point where it will no longer be growing faster = than the=20 overall economy. He warned, however, that when companies grow, = management need=20 to change and adapt, and investors may need to sell if management = doesn't keep=20 pace. Fisher recommended against selling for short-term reasons=97for = example, to=20 take profits if a temporary downturn is expected.=20 <P>Fisher suggested that investors use a three-year rule for judging = results if=20 a stock is underperforming the market but nothing else has happened to = change=20 the investor's original view. If after three years it is still = underperforming,=20 he recommended that investors sell the stock.=20 <P>On the other hand, Fisher advised selling "mistakes" quickly, once = they are=20 recognized.=20 <P>Lastly, Fisher warned against overdiversification, which he felt = caused=20 investors to lower their standards and to put money in companies in = which they=20 do not thoroughly understand. Sufficient diversification, he said, would = be an=20 investment in 10 or 12 larger companies in a variety of industries with=20 different characteristics, and any holding of over 20 companies is = probably too=20 much. </P></SPAN></DIV> <DIV><BR></DIV></SPAN> <BLOCKQUOTE dir=3Dltr=20 style=3D"PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; = BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px"> <DIV style=3D"FONT: 10pt arial">----- Original Message ----- </DIV> <DIV=20 style=3D"BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: = black"><B>From:</B>=20 <A title=3Dwlittle1@peoplepc.com = href=3D"mailto:wlittle1@peoplepc.com">Winston=20 Little</A> </DIV> <DIV style=3D"FONT: 10pt arial"><B>To:</B> <A = title=3Dcanslim@lists.xmission.com=20 = href=3D"mailto:canslim@lists.xmission.com">canslim@lists.xmission.com</A>= </DIV> <DIV style=3D"FONT: 10pt arial"><B>Sent:</B> Monday, July 08, 2002 = 12:18=20 PM</DIV> <DIV style=3D"FONT: 10pt arial"><B>Subject:</B> [CANSLIM] Stock = Strategies</DIV> <DIV><BR></DIV> <DIV><FONT size=3D2>Very interesting data.</FONT></DIV> <DIV><FONT size=3D2></FONT> </DIV> <DIV><FONT size=3D2>Does anyone know a general description of = what method=20 Philip Fisher uses?</FONT></DIV> <DIV><FONT size=3D2>I believe that he advertizes on the IBD web=20 site.</FONT></DIV></BLOCKQUOTE></BODY></HTML> - ------=_NextPart_000_028F_01C2267D.278A2E90-- - - - -To subscribe/unsubscribe, email "majordomo@xmission.com" - -In the email body, write "subscribe canslim" or - -"unsubscribe canslim". 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