Philip Fisher's Fifteen Points in Picking a Stock
(November 4, 2004)
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Dear Subscribers and Readers,
At last, the 2004 Presidential election is over. We can now get back to business and make this country a great country once again. I am not going to make that many comments on the election here because I admit that I do not know much about the history of U.S. Presidential Elections or U.S. Presidents in general. I am not ignorant – I am just not a political scientist nor have I spent a term in either the House or Senate so I just do not regard myself as knowledgeable in the political arena. However, I would like to say this: Now that the election is over and done with, the market can get back to anticipating the future direction of the general economy instead of trying to figure out who will be the next President of the United States. I would also let history be the judge of President Bush – since we probably cannot objectively gauge his performance during his two Presidential terms until many years from now.
More Broad Market Comments
Since our weekend commentary, the stock market has been enjoying a good uptrend. Not only in the major indices but in many individual stocks as well – as evident from the number of new highs on both the NYSE and on the NASDAQ. Breadth has been good and even our DJIA Timing System has performed well despite the underperformance of the Dow Jones Industrials over the last nine months.
That being said, I do not see us going 100% long in our DJIA anytime soon – at least not in the next few trading days. As a rule, I do not like to buy on breakouts – especially breakouts in a market that is overbought – which is where we are right now. The fact that the major indices (especially the Philadelphia Semiconductor Index a.k.a. the SOX) did a partial reversal yesterday afternoon also says that the market may be actually weaker than I initially had anticipated. Look at the performance of Google (GOOG), Research in Motion (RIMM), and Taser (TASR) yesterday and you will know what I mean. The next few days make be another period of consolidation before we go up again but it could also be the beginning of another significant correction. I just currently don’t know. Look, the Dow Jones Industrials is still trading within a declining channel even with the gains of the last few days. The Dow Jones Transports made another new high on Monday that was UNCONFIRMED (not by a long shot) by the Dow Jones Industrials once again. My original scenario anticipated that the market should have been stronger yesterday, but that did not happen. The 10-day moving average of the put-call ratio is currently indicating to us that the market is overbought (circled below – the chart is courtesy of www.decisionpoint.com), along with the 5-day and 5-week RSI technical indicators that are used by the www.vtoreport.com.
Bottom line: We remain 50% long in our DJIA Timing System but reserve the right to change our stance (either buy or sell) going forward in the next couple of weeks. Any change in our position will be reported in our “Special Alerts” section in our discussion forum in real time.
Okay, let’s get back to the discussion of our main topic…
Since I believe the market is currently overbought, I am going to take a wait-and-see approach with regards to any further purchases of common stocks. However, I still believe that we are in a cyclical bull market, and in a cyclical bull market, the profits to be made are from the long side. Therefore I would like to present to you a set of criteria that Philip A. Fisher discussed in his book “Common Stocks and Uncommon Profits” that were successfully used by him over the years in determining whether to purchase a particular common stock.
Please note that these “Fifteen Points” for purchasing a stock represented only a part of his book, and that there are other chapters in his book that are well worth the money many times over – such as his discussion of the “scuttlebutt” method for picking a stock and the various “Don’ts” that he discusses with his readers. I would definitely recommend buying his book if you are (or want to be) a serious stock picker.
These “Fifteen” points should always be kept in the back of the mind of the individual investor when it comes to filtering out potential stocks to buy. A lot of stocks can be eliminated from a list of potential buys just from casually glancing at these 15 points, but some of these may involve asking questions or even doing technical research. Now, without further ado:
Philip A. Fisher’s 15 Points to Look for in a Common Stock
- Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
- 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?
- How effective are the company's research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles or disappointments occur?
- Does the company have a management of unquestionable integrity?
Henry To, CFA