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.