15 Point Common Stock Checklist by the Father of Growth Investing

Previously I had written about a list of Don’ts that was listed in Common Stocks and Uncommon Profits. A classic investment book that is left out on most reading lists.

If you recall, Buffett said that he is was “85% Graham and 15% Fisher”.

But Buffett today is much more Fisher than Graham now.

How much?

Take a look at Fisher’s style of investing until his death in 2004.

  • Purchase and hold for the long term
  • Hold a concentrated portfolio
  • Buy outstanding companies with compelling growth prospects
  • Buy companies that you understand very well

Fisher is actually labeled the father of growth investing and he certainly wasn’t keen on statistical bargains like Graham did.

The fact that accounting can’t easily identify business headwinds was a reason he didn’t like the idea of cheap stocks. He also found that one good growth stock will outperform a bargain stock because the intrinsic value will increase compared to a cheap stock where it’s intrinsic value can easily decrease.

So you can see what type of effect Fisher had on Buffett.

And if Buffett says that Philip Fisher is a man worth learning from, then that applies to us too.

 

Great Quotes by Phil Fisher

Here are some awesome  quotes by Phil Fisher to get started.

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”

“I don’t want a lot of good investments; I want a few outstanding ones.”

“what really counts is a management having both a determination to attain further growth and an ability to bring its plans to completion.”

“it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”

“Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.”

“Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”

The Invention of Scuttlebutt

Scuttlebutt, a verb created by Fisher where the investor scrabbles information from all sources to obtain a complete view of the company business, prospects, management and competitors.

I am aware that most investors are not in a position to do for themselves much of what is needed to get the most from their investment funds. – Fisher

This is still true today.

Time has to be invested to become better and to find what suits you.

Not all people find the time to research companies, but there are many shortcuts and methods of finding information.

Some of those methods are towards the end.

Fisher didn’t have the internet to make his work easier, but even if he lived today, I doubt he would be sitting behind his computer reading news and articles solely as his main source of information.

He’d he out on the streets visiting companies, making calls, talking with management and reading books or textbooks on industries he is interested in.

After all, Fisher held Motorola from 1955 to 2004.

That’s just unheard of nowadays unless your name is Buffett.

But thanks to Fisher’s work, he left you with a very useful scuttlebutt common stock checklist.

15 Points in a Common Stock Checklist

common stock checklist

  • Bold text are the checklist points
  • Quotes are from the book to emphasize the point
  • Additional commentary added by me
1. Does the company have the products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Remember Heely’s (HLYS)?

Those kids shoes with a built in wheel?

Here’s what happened to the company.

Avoid fads and one hit wonders. Crocs, Inc. (NASDAQ:CROX) also went through the same issue and I showed the history of the company based on its cash conversion cycle. But they’ve reinvented themselves into a real shoe company.

Find a company with a competitive edge offering products and services that help businesses make money.

If a business is able to help other businesses make money, there is something good going on.

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

Is management exploring ways to create further business opportunities?

If you look at all the businesses that died or currently suffering, their product lines were over exploited or they didn’t bother with development and adapting.

An example I used years ago was Motorola and their super phone the razr.

The problem was that Motorola got too comfortable and big headed about its success and didn’t bother to come up with new products.

Then Apple and Samsung came along, and it was too late.

Another example is Xerox Corp(NYSE:XRX).

You know them for their copying machines, but did you know that 55% of revenues now come from their services business?

They were supposed to have been dead, but their expansion into cloud and B2B services have pushed them into strong contention.

Stock price obviously followed the positive changes and results.

Checklist

3. How effective are the company’s research and development efforts in relation to its size?

Pretty simple as it is. Is the company over spending or under spending?

One easy method you can use is to compare the R&D expense in relation to competitors.

A company with a bigger moat can spend less on R&D and still have the same effectiveness. Whereas, a weaker competitor will have to outspend the #1 competitor to try and develop something better.

A Warren Buffett’s way of looking at R&D is that a high R&D usually dictates high SG&A which threatens the competitive advantage.

Look at the difference between Intel and AMD.

 

Intel was always dominant in the PC industry, but their R&D expense has increased due to the work they need to do for mobiles.

On the other hand, AMD’s R&D expense during 2008, 2009 was in the 30% range. In absolute dollars, it is much less than INTC, but that’s what a moat can do to weaker competitors.

In relation to its size, AMD was spending a huge amount and has dramatically dropped off which is not a good sign.

4. Does the company have an above average sales organization?

No matter how good a product is, it is useless if it can’t be sold. Many investors don’t pay as much attention to the efficiency of a company’s sales, advertising, and distribution.

It is the making of repeat sales to satisfied customers that is the first benchmark of success – Fisher

Go to Google and search “Anti (company name)” and you will get a whole list of hate sites. Here you can get a good idea of why customers are not satisfied.

People outside the company are seldom hesitant in expressing their views.

Another method to determine the sales quality of a company is to use glassdoor to view the

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