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Geoff Gannon
Geoff Gannon
Articles 

What Stocks Would Phil Fisher Buy Today?

Someone who reads my articles sent me this question:

Hi Geoff,

Among the companies that you know well, which ones do you think would interest Phil Fisher today?

Sylvain


Wow. Thats a hard question. Its a good question. But a hard one to answer. I know what companies I know well. And I think I know what companies would interest Phil Fisher. The problem is finding where those two lists overlap.

So first of all Phil Fisher was not concerned with price. Im not saying he wouldve bought a dot-com company at the height of the bubble. But I am saying he didnt worry about price. If a stock had a P/E of 14 or 40, he might still be interested. Im not interested in a stock with a P/E of 40.

Someone asked me the other day if Id ever bought a stock with a P/E over 20. Im not sure I have. I mean Im sure I have technically bought a stock with a P/E over 20. Because Ive bought stocks in years where they had almost no earnings. The way math works, its easy to get very big price ratios if you have a denominator close to zero. So when a company is basically just breaking even in a bad year the P/E ratio could be astronomical. But Im sure thats not what he meant. The question I think he was asking was whether Id ever paid 20 times a companys record earnings.

I dont think so.

No. Im pretty sure Ive never paid 20 times a companys all-time high earnings. I think Id remember doing that.

Well Phil Fisher was different. He would gladly pay 20 times earnings for the right company. For Phil Fisher, the right company was a fast grower.

Fisher was also very focused on a companys organization. Not just competitive advantages like Warren Buffett. But the actual people who worked at the company.

And while Buffett is interested in per share profit growth wherever it comes from Fisher was a much bigger believer in looking for organic sales growth. Not just growth through buybacks.

I tend to be much more of a Buffett investor than a Fisher investor. I am probably happiest buying a somewhat slower growing company with a lower price than a faster growing company with a higher price.

In theory, this isnt very logical. Lets look at how many earnings $100 of my capital would buy at two different companies.

First is Coach (COH). Coach costs $74.06 a share. So $100 will buy you 1.35 shares of Coach. Coach has $3.25 in earnings per share. So, 1.35 shares would deliver $4.39 in earnings. We can think of $4.39 as the amount of present earnings your $100 can buy in Coach stock.

Now lets look at Dun & Bradstreet (NYSE:DNB). Dun & Bradstreet costs $80.27 a share. So $100 will buy you 1.25 shares of Dun & Bradstreet. Dun & Bradstreet has $5.29 in earnings per share. So, 1.25 shares would deliver $6.61 a share in earnings. We can think of $6.61 a share in earnings as the amount of present earnings your $100 can buy you in Dun & Bradstreet stock.

Coach grew revenue per share 20% over the last five years. While Dun & Bradstreet grew revenue per share 9% a year over the last five years.

Lets imagine just for the sake of argument what would happen if Dun & Bradstreet and Coach both grew their earnings for the next five years at the same pace they grew them over the last five years.

This is how much earnings my same $100 would buy in each stock:

Coach (COH) Dun & Bradstreet (NYSE:DNB)
Today $4.39 $6.61
2012 $5.27 $7.20
2013 $6.32 $7.85
2014 $7.59 $8.56
2015 $9.11 $9.33
2016 $10.93 $10.17


In four years, my $100 investment in Coach would be earning nearly the same amount per year as my $100 investment in Dun & Bradstreet. And in five years, Coachs earnings would pass Dun & Bradstreets earnings.

If Coachs growth prospects still looked good in five years, the stock might have a P/E of 20. Meanwhile, Dun & Bradstreets growth might still be barely inching along. Actual sales growth at DNB is only around 3% a year. The per share growth is due to constant share buybacks. Check out Dun & Bradstreets 10-year financial summary for evidence of the mammoth stock buyback theyve done over the last decade. Shares outstanding have declined almost 40%.

Anyway, if DNBs organic sales growth was around 3% or so five years from now the stock could easily have a P/E of 12. So, you could certainly imagine a scenario five years from now where Coachs price per share is $219 ($10.93 * 20) while Dun & Bradstreets stock price is only $122 ($10.17 * 12).

I cant argue with that. Its certainly possible. Personally, Im not at all sure a P/E of 12 makes sense for Dun & Bradstreet under any circumstances. If they simply diverted all the cash they use to buy back shares to paying out dividends instead its unlikely even a no-growth stock would have a dividend yield of 8%. This illustrates the lunacy of focusing on growth apart from earnings retention. You cant have it both ways. Either DNB is a 9% grower which means you count the buybacks or DNB is a 3% grower, but it pays out all its earnings in dividends.

Im saying that the high quality of DNBs earnings they entirely in the form of free cash flow and the stable nature of their wide moat business means the stock should sell for 15 times earnings even when its barely growing. I believe that.

What do I believe about Coach? Its hard to say. I dont believe or at least Im not willing to act on my belief that Coach will grow its earnings by 20% a year over the next five years. It could. But even if it does accomplish that the markets view of growth from that point on will be key.

A simple way of looking at this is to see that Coach is trading at a multiple thats around two times Dun & Bradstreets multiple. What are the chances Coachs multiple will contract from the roughly 24 times earnings range to the roughly 16 times earnings range? And what is the chance that DNBs multiple will expand from around 12 times earnings to around 16 times earnings?

Both of those events are real possibilities. And I tend to see the investment world in that way. I think its very possible $100 invested in Coach and $100 invested in DNB will produce similar amount of earnings five years from now and those earnings may be valued in similar ways.

Coachs growth could falter before the five years is up. Or Coach could so wow investors in terms of its truly long-term growth prospects that the stock still fetches a P/E of 20 to 25 half a decade from now.

It would be hard for me to choose between those two stocks. Quantitatively it would be impossible. If forced to choose, Im sure Id pick Dun & Bradstreet. But thats a qualitative decision. I think I understand DNBs business its competitive advantage better than I understand Coach. That would be the only reason for picking DNB over Coach. I cant argue mathematically that Coach is an inferior stock at this price. In fact by the numbers Coach looks absolutely wonderful.

Thats how I look at stocks. But thats not how Phil Fisher looked at stocks.

I dont think Phil Fisher would actually be attracted to either Dun & Bradstreet or Coach. I think he would consider both stocks outside of his circle of competence. In one of his books, he explains how he personally focused on manufacturing businesses with a significant technical aspect. Something scientific. That was his niche. Fisher didnt argue that his general approach couldnt be applied to food companies, retailers, media businesses, etc. He just didnt invest in those companies himself.

Im sure Fisher would consider commercial databases and luxury goods way outside his circle of competence. So, Fishers approach might work for those stocks. But they wouldnt be stocks hed buy personally.

Here are some stocks Phil Fisher might be interested in:

Waters (NYSE:WAT)

Balchem (BCPC)

Idexx (IDXX)

II-VI (IIVI)

Mesa Laboratories (MLAB)

Masimo (MASI)

I dont know most of those companies very well. I probably know Waters the best out of that group.

Obviously, there are companies outside of Phil Fishers area of focus manufacturing with technical elements that fit many of his principles.

Among really high profile companies, the three that stand out are:

1. Amazon (NASDAQ:AMZN)

2. Netflix (NFLX)

3. Wells Fargo (NYSE:WFC)

Of those 3, Amazon stands out the most. Jeff Bezos often seems to be channeling Phil Fisher. And I imagine that if Fisher were ever interested in a retailer it would be a retailer with Amazons attitude about technology, customers, growth, and the long-term. More than anything though its Amazons constant internal push to develop new sales and especially new ways to serve existing customers without being prompted by outside forces that makes me think its a company Phil Fisher would be very interested in.

Fisher liked companies that had a philosophy of growth. Something internal to the organization that caused it to seek ways to grow sales, win new customers, develop new products. Fisher obviously wanted a great organization in an industry with great long-term prospects. But I think a lot of growth investors focus more on the latter issue than Fisher would. I know they dont focus enough on the first issue. Fisher wanted a great organization first and foremost.

Im not sure any of the stocks Ive mentioned in this article are necessarily good buys. The one exception is Wells Fargo. Im never comfortable calling a bank entirely safe. So Im less sure about suggesting any financial stock as a good buy than I am about stocks in most industries. But if you look at what Wells Fargo has achieved and what they are likely to achieve over the next ten years or so and then consider the price you are paying for the stock today I think its pretty hard to come up with reasonable assumptions that tell you Wells Fargo is too expensive right now. Maybe you dont feel the same way I do about the organization and the opportunities in cross-selling products to existing customers. Thats fine. But if I had to pick one stock I mentioned here as a stock worth investigating as a long-term buy and long-term is the only kind of buy Phil Fisher believed in its Wells Fargo.

Waters is not especially cheap. But thats also an interesting company. It might be a bit slow growth a lot of the EPS growth you see there is from buybacks for Phil Fishers taste. But it seems like a perfectly good company to me.

There is one stock in one industry that is pretty far afield from the kind of companies Phil Fisher actually invested in during his lifetime that Im definitely interested in and I actually think lines up pretty well with a bunch of Fishers principles.

That stock is DreamWorks Animation (NASDAQ:DWA).

I wont try to defend DreamWorks as a Phil Fisher stock. Im sure a lot of you are scratching your heads right now about that name and what it has to do with Phil Fisher. If you are Id suggest learning more about DreamWorks.

Its no use reading the financials. This is a movie studio. It makes a couple movies a year. You wont find a pattern in the summary financial data.

But I think if you learn about the management, organization, employees, their attitude toward technology and growth and so on I think youll find DreamWorks to be surprisingly in sync with Fishers philosophy.

Which brings me to my most important point. Just about all the stocks I talked about are pretty big stocks. Because people think of Fisher as being synonymous with world class quality they tend to look at bigger stocks than Fisher himself usually did.

The important thing is taking Phil Fishers philosophy and applying it to the industries you know best. Its Fishers general approach that matters. Not necessarily his focus on any one specific industry.

And try to apply Fishers ideas to the smallest stocks you can find. Everyone is looking for high-quality companies with good long-term growth prospects among the biggest companies out there.

The best place to apply Fishers ideas is somewhere thats considered highly speculative. If other investors are buying and selling some stocks without regard to the quality of the businesses thats the place youll get the most use out of Fishers ideas.

But the most important part of Fishers philosophy is the holding. You need to buy a stock with the intent of holding it forever. You need to wait 3 years before youll know if the stock is panning out.

Im serious about the 3 year part. Fisher mentions 3 years as the amount of time you should wait if you like a company, buy its stock, and then watch its stock go nowhere. He says you should wait 3 years before you call it quits.

Thats simple advice. But its probably the part people have the hardest following.

Ask Geoff a Question About Phil Fisher

About the author:

Geoff Gannon



Rating: 3.2/5 (29 votes)

Comments

tonyg34
Tonyg34 - 8 years ago    Report SPAM
interesting article, I'm a little surprised you didn't mention Graco (GGG) as a potential Fisher stock, you talked about it before and it seems to fit the bill. I think the managers at Mairs & Power are pretty Fisher influenced, they own a lot of mid cap industrials that they bought at rich valuations that just get richer as the years and earnings mount up.

Betting on long term growth stocks takes a different type of intelligence than value investing. You have to get comfortable with abstracts like future demand (the pie getting bigger, not just getting a bigger slice of the pie). Old school value can be easier in some ways. Are you good at math? Do you have the patience to stick to your process? Since investing requires homework, ones approach tends to reinforce ones personal interests.So whatever you enjoy thinking about/researching will eventually reflect itself in your portfolio
cyclop9
Cyclop9 - 8 years ago    Report SPAM
Geoff I'm pretty sure you can express yourself with far less words. You write interesting stuff but they could be shortened to increase readability.

Thanks
batbeer2
Batbeer2 premium member - 8 years ago
Hi Cyclop9

Try: Geoff, you write interesting stuff, thanks. Using fewer words improves readability.

If you feel that "isn't you", don't.

Please leave your comment:



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