The Fisher Strategy

Kenneth Fisher is an investment manager of high profile and also a very wealthy, if not one of the wealthiest Americans. He has credit for establishing an indicator with enormous influence on the stock valuation – the price-to-sales ratio. He is respected as one of the best investment professionals there are due to his research, his published books (Super Stocks) and Fisher Investments – his successfully developed firm.

Fisher, born in 1950, graduated in 1972. Afterwards his father – Philip Fisher, a famous investment analyst - gave him employment. In 1979 Kenneth founded FI (Fisher Investments). Since then, he has written seven books, research articles and papers and still writes a column for Forbes.

Fisher expressed his opinion on the matter how investors should value and approach stocks, in Super Stocks. His firm having expanded to 42 bln dollars, he broadened his views. The successful approach of price-to-sales ratio, together with other factors of quality and quantity, continues to be appealing to value investors.

The strategy of investment shown to Super Stocks consists of a value-based formula that has the purpose of investing in quality companies at a reasonable price. Fisher describes the result as Super Stocks – in the 1^st 3-5 years after the purchase, these stocks would increase in value 3-10 times. He will look for companies which suffer ‘glitches’. In his words, this problem is often faced by newly found companies. He cites obstacles in earning, created by teams of management while the firm is growing. During a lack financial profit, he explains, very few are the investors that have a basis by which to value growth stocks, this being the reason for the loss of supporters. The most effective managements overcome difficulties as soon as they occur thus making their sales and profits pick up in time.

Fisher is convinced earnings are not a factor which gives accurate forecast for the future. Instead, he chooses to focus on potential margins for profit and the price-to-sales ratio. These, he says, give an insight on the quality business that is done by the particular company.

In place of corporate earnings being used (like the P/E), corporate sales are used by the PSR. Calculation is done by dividing the total value of the market by the corporate sales of the last twelve months.

Fisher also puts into use the metric PRR – price research ratio. It analyses the Ramp value - dividing the company’s market value by the expenses for corporate research during the past year. This gives the opportunity to spot stocks that are not Super Companies.

According to Fisher, here’s what a Super Stock must have: a capital that is able to support 5 years at the least, during which the company is at a loss; a maximum of forty per cent of assets that are debt-financed; net free capital, able to cover minimum 3 years of negative money flow.

The criteria of Super Stock are only applied to Super Companies. These companies display healthy characteristics of quality. They emphasise on the method of finding companies that have a management skilful enough to correct mistakes and go on, not investing in stocks that are considered ‘living dead’. Fisher’s criteria resemble the checklist his father created. It includes: orientation of growth; excellence of marketing; advantage in competition; creativity of the personnel quality finance control.

‘Almost never’ – that is how Kenneth Fisher describes the right moment for the selling of a Super Stock. However, if the company no longer qualifies as a SC, the stock may get sold. There are three ways by which investors can find candidates with real potential – look out for PSRs that are low, companies that are at a loss and qualitative evaluation of companies considered superior.

Ken Fisher on the bull market

The CEO of Fisher Investments Ken Fisher had recently said that there was a trend from large-cap stocks. Fisher noted some of the recent trends in the bull market in a recent interview for the CNBC.

A victory for Ken Fisher?

The stock picks of the billionaire hedge fund manager Ken Fisher have a tendency to outperform the market. During Q2, Fisher Asset Management increased its stake in NIKE, Inc. to a total of 3.7 million shares. At the beginning of the quarter, the hedge fund owned only 50k shares of Nike, so it could be said that Fisher’s team has made quite the confident stock pick.

Renaissance Technologies was also interested in Nike during Q2. It owned 1.6 million shares for the end of June 2012. The success of RT gave its founder Jim Simons the opportunity to build a net worth of 11 billion dollars.

Nike’s revenue was up 16 per cent over the last fiscal year and it has grown a GAGR of 7 per cent. The company’s net income was also up with its posting a 4 per cent growth rate for May 2011. Earnings per share were up 8 per cent. EPS has grown at 6 per cent annual rate for the last 4 fiscal years, whereas the net income has grown at a 4 per cent rate. The board of Nike has recently approved a repurchasing program of 8 billion dollars which is expected to last about 4 years.

NIKE, Inc. is able to charge a price premium since it’s an owner of a global brand. It may be expected that the company is exposed to a poor macro environment, but that is not the case at all: the stock’s beta is 0.9 and it tends to fall or rise about in line with the market. It is up 71 per cent over the last 5 years.

Ken Fisher’s shares in Starbucks

Billionaire Ken Fisher’s stock picks have outperformed the stock market. The positions of his Fisher Asset Management have not changed in size over the second quarter. Comparing the hedge fund’s 13F from Q2 with its Q1’s, we can see that a few stock positions have increased by 2 per cent or decreased by 1 per cent and so on, until we get a peek of Starbucks. The holdings of Fisher Asset Management of the coffee shops rose to 10m shares (for the end of June) from 550k (for the beginning of April). The stock of Starbucks rose with additional 8 per cent in 2012. It is also up 77 per cent in comparison to 5 years ago and it has more than doubled in price for the past 2 years. Another large position in Starbucks is of Columbus Circle Investors with 3.6 m shares.

The third fiscal quarter of Starbucks was characterized by 13 per cent increase in revenue in comparison with the third fiscal quarter in 2011. Marco watchers are worried about the American consumers and a common debate is that whether American should spend 5 dollars for a cup of coffee. Nevertheless, the segment of America reported 7 per cent same-store sales growth. Moreover, the same-store sales have risen with 12 percent in China/Asia-Pacific. Since many fixed costs were held in check, the net income has increased with 19 per cent.

The revenue of Starbucks has grown with 15 per cent and the company’s net income has risen to 16 per cent in comparison to 2011.

Starbucks is a growing business but the catch is that it carries a premium valuation. 27 is the number of the trailing price-to-earnings, and the estimation of forward earnings is 20 per cent EPS growth for 2013.

Starbucks could be compared to other companies which share the same problems – Green Mountain Coffee Roasters, which like Starbucks depends on the demand for coffee, Dunkin Brands, McDonalds and Panera Bread.

Being lampooned as a company which have locations that are within spitting distance of one another, it has still managed to get down to serious business. Moreover, it trumps both McDonalds and Dunkin in terms of recent growth.

Kenneth Fisher joins Warren Buffet

Warren Buffet has been interested in American Express Company, which for a long time has been rendering travel management along with providing charge and credit cards.

This Q2 Fisher Asset Management joined Warren Buffet in the stock and the position for Q2 was 6.6 m shares. In Q2 American Express’ revenue increased by 3 per cent as a contrast to last year’s. The company’s earnings increased from 1.10 to 1.15 dollars per share due to a decrease in share count, whilst net income remained unchanged. The numbers of the company have been more or less good for the first few months of 2011 with EPS being 2.07 dollars and 2.22 dollars for 2012. That is 7 per cent growth rate which is not enough to classify AE as a growth rate stock but it is enough to show that the company manages to get down to business.

It is noted that American Express has a tendency to buy back shares since the share count decrease in 2011.  The company has announced that it will return a half of its return on capital to shareholders through a channel of buybacks and dividends. In the beginning of 2012 the buybacks consumed 4 times as much cash as dividend and cash payments. In order for the company to hit analyst targets, it has to grow very little with having a P/E of 12, which will lead to the stock price being undervalued.

This valuation gives away the ownership of 150 m shares by Berkshire Hathaway. Another investor in American Express is Eagle Investment Management, which has reported 9.9 m shares for June 2012. Adage Capital Management has increased its position by 53 per cent for Q2 to 1.5 m shares.

Visa and Mastercard’s P/Es are much above these of American Express – 18 for Visa and 16 for Mastercard. Moreover, they have a small part in Berkshire’s portfolio. Their growth rate was better than that of American Express in Q2 with their revenue being 10 per cent more than it was in 2011. Discover Financial Services has decreased its earnings for Q2 in contrast to 2011. American Express serves as a medium between Discover, Visa and Mastercard since its valuation doesn’t depend on a strong growth rate.

The Commercial Observer’s interview with Kenneth Fisher

Community approval is perhaps the hardest thing for a developer to do. Whatever the developer does, there will always be naysayers. Should these naysayers intervene when it comes to preventing the bulldozer from moving in?  The following interview with Fisher was carried out by The Commercial Observer.

And here is what the partner at Cozen O’Connor Kenneth Fisher has to say concerning this matter.



The Commercial Observer: It seems that most, if not all, of your work is done outside the courtroom.
Mr. Fisher: A substantial part of my practice is land-use and zoning work, so those usually wind up in litigation only when there is a challenge—and those challenges usually come from some objector in the community.
For me, a recent example would be: I did the entitlements for the Dock Street DUMBO project for Two Trees. There was a litigation, which I handled and won, together with the corporation counsel’s office, obviously. Then there was an appeal for that, and we won the appeal in the Spring. And they’ve started site demolition, and they are going to start construction shortly.
So how essential is land-use litigation for developers, then?
I think the sort of macro observation that I would make is that land-use litigation over the last year or two has been “the dog that didn’t bark.” There have been challenges to most of the major actions, and some minor actions, that have come through City Planning and the City Council. Most of them have failed.
How did the opposition to the Dock Street development fail?
The proposal calls for a 17-story building in close proximity to the Brooklyn Bridge, with a 300-seat public middle school in the base, the core-and-shell of which is being donated by Two Trees. Also some neighborhood retail and parking.
There was some degree of controversy over whether views of and from the Brooklyn Bridge would be impacted. But, you know, I think that the people who were most agitated were the people whose views from their own apartments would be impacted.
While there was active organized opposition, there was also active support—as a result of which, as many people testified for the project has testified against it at the public hearings, and it was ultimately approved not just by the City Council and the Planning Commission, but it was approved by the Community Board.
A lot of the opposition dropped by the wayside when the council gave the go-ahead to the project. But there were a couple of dissidents who brought a lawsuit, and they challenged everything from the rationale of the project to the design solution that we developed with City Planning to the adequacy of the environmental assessment. All of that was dismissed at the trial court level.
If you’re, say, Jamestown Properties, how would you prepare yourself for ongoing community opposition over projects like the proposed Chelsea Market expansion?
I once published a letter in the New York Times; I said I had a dream that the mayor announced an agreement with the Almighty to build a stairway to Heaven. And when they announced the location, half the people said that it would lead to gentrification, the other half said it would bring in the riffraff, and everybody agreed that it would be bad for traffic.
The point of the story is that no matter how benign a project is, it’s going to upset somebody.
What kind of project do you think upsets people the most?
What gets attention are the “baby carriages in front of the bulldozers” projects. NYU is a situation like that, where the people who were opposed to NYU weren’t particularly interested [in] negotiating. They simply wanted to preserve Greenwich Village the way it was [yesterday].
It wasn’t a question [of] putting in a day-care center or making it bigger or smaller for a lot of them. There are others who wanted to engage, and the result was that the council got NYU to make some changes just before they gave the final go-ahead. That’s the give-and-take and the back-and-forth of the process. But it’s not Newtonian, because governments are bodies in motion that don’t always stay in motion, and reactions are never equal and opposite.

Source: The Commercial Observer