Many investors have heard of Warren Buffett, but perhaps less know is Phillip Fisher, and his rules on investing in the stock market. Fisher is one of the investment greats with a stellar track record of investing in well-managed, high-quality growth stocks for the long-term. In fact, Fisher is one of Buffett’s investing mentors. Fisher’s most famous investment was that of Motorola – he bought the stock in 1955 and did not sell it for the remainder of his life (he passed away in 2004). In his book Common Stocks and Uncommon Profits, Fisher shared a checklist of 15 characteristics he…
Many investors have heard of Warren Buffett, but perhaps less know is Phillip Fisher, and his rules on investing in the stock market. Fisher is one of the investment greats with a stellar track record of investing in well-managed, high-quality growth stocks for the long-term. In fact, Fisher is one of Buffett’s investing mentors.
Fisher’s most famous investment was that of Motorola – he bought the stock in 1955 and did not sell it for the remainder of his life (he passed away in 2004). In his book Common Stocks and Uncommon Profits, Fisher shared a checklist of 15 characteristics he looked out for when it comes to buying growth stocks. I want to discuss his checklist in a series of articles, and I recently published the first article in the series, which looked at the first three criteria in Fisher’s checklist.
This article – Part 2 – shall look at the next three characteristics.
4. Does the company have an above average sales organization?
Sales are, after all, the main reason for a company to be able to grow profits and cash flows. Here, Fisher is talking about how effective an organization’s sales force is, so that investors would be able to assess if the company can do better than its competitors. There are a few ways to calculate this – some companies release sales numbers by employee or retail stores, and investors can use such numbers to compare across all companies within the same industry. These metrics are used to measure how much sales are being generated per employee, and if sales per employee or store are lower than competitors, it may be symptomatic of problems with a company’s competitiveness and corporate structure. Such signs should make us more wary of investing in the company.
Another method of assessing Fisher’s fourth criterion is to compare the salaries of a company’s sales staff with the industry-average that can be found on websites such as Glassdoor. If a company’s sales staff is incentivized well compared to other companies, this may also be a sign that the company has a progressive and superior remuneration structure in place which could attract better talent.
5. Does the company have a worthwhile profit margin?
Profit margins are a way to assess if companies have a good cost structure. If a company’s profit margins are consistently very thin (e.g. 1% to 2%), then the company is at risk of falling into losses should its expenses spike up unexpectedly. On the other hand, companies with very strong profit margins (for example, 20% and above) should also be assessed to see if such high margins are sustainable – high margins tend to attract competition that erodes the margins over time. I recently discussed the gross profit margin here and operating profit margin here.
6. What is the company doing to maintain or improve profit margins?
As investors, we should study a company to see how it is trying to improve its profit margins. Some methods are: A major restructuring exercise which will eliminate a huge chunk of costs; re-configuring factories so that they are more efficient and use less resources; acquiring a new division which has much higher margins and retiring older, weaker divisions. Companies which do not make any effort to improve their profit margins should be shunned, as it implies that management does not take cost-control seriously.
Of course, we must also ensure that such initiatives enable higher profit margins to persist, and do not simply result in a one-off temporary increase in profit margins which will fizzle out in future years.
Part 3 will look at the next three points within Fisher’s 15-point checklist. Stay tuned!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.