Philip Fisher, author of Uncommon Stocks and Uncommon Profits, boils down his investment research into 15 key points in Chapter 3 of his book, Uncommon Stocks and Uncommon Profits. Not all of these are required for him to purchase the stock, but he does think that the company should check a large majority of these boxes for you to consider purchasing that stock. I have outlined the Philip Fisher 15 Points and some quick summaries below:
1 – Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
An awesome example that Fisher gives when talking about this topic is that when televisions first really became prevalent, there was a huge boom of them being sold and then once 90% of homes had a tv, there was a steep drop off in demand because nobody needed more than one tv (which is funny to think about nowadays…or maybe it’s sad, actually).
He says that there are two types of successful companies – those that are fortunate AND able, and then those that are fortunate BECAUSE they are able.
For instance, the example that he states is that aluminum companies might be successful because the aluminum demand spikes and they have the ability to meet that demand, but on the flip side, a company like Corning, who was a light bulb manufacturer, was able to adapt their bulbs to make bulbs for televisions that allowed for the opportunity for endless demand. So, they were able to adapt their product to meet the need.
This is the type of company that you want to invest in – one that can adapt.
He also gives Motorola as a great example.
Motorola was a leader in two-way communication that was primarily used for police and taxis, and they took that technology and adapted it to be able to grow into trucking, delivery fleets, utility companies, construction projects, the pipeline industry, etc.
So, again, they took technology that they already had and adapted it to meet demand that already existed.
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 been largely exploited?
Fisher notes that the type of business development is typically most successful when they focus in areas that they’re already related to rather than something completely different.
Does it seem like the company you’re researching is focused and intentional with their BD, or does it seem somewhat random?
The BD needs to be very focused and specific to really have a chance at growing the business.
3 – How effective are the company’s research and development efforts in relation to its size?
This is a pretty easy ratio to calculate and you can do so by taking revenue/business development spend.
You must remember that the results will vary greatly though as companies are drastically different, so you need to compare this by other peers in the industry.
Some companies are great at this, such as defense companies that will learn how to create a specification that the government is requesting, and willing to pay for, and then take that same technology and apply it to their own business.
I know that this is a one-off example that Fisher gives but the concept is very relatable – always be looking to ways that your BD operations can overlap with each other, and help benefit current products, to help spread out the cost among different products and increase multiple revenue streams.
4 – Does the company have an above-average sales organization?
Fisher really focuses on this a lot. Training is such an important aspect when it comes to sales, and it’s probably the best way to measure the success of a company.
Does the company simply hire their sales students from college and throw them to the wolves? Or, do they teach them and train them to make them the best sales people that they can be?
IBM, for instance, said that they spend 1/3 of a salesperson’s time in training, according to Fisher. That is a ton! Those are the types of things to evaluate when trying to measure the effectiveness of a sales force.
5 – Does the company have a worthwhile profit margin?
To evaluate this, Fisher recommends that you study a company’s earnings over multiple years rather than just the most recent couple of years.
He also notes that a bad company typically will show a larger jump when good things happen in the industry and a steeper drop off when something bad happens in the industry, so those are some key indicators that you should always be looking out for.
6 – What is the company doing to maintain or improve profit margins?
One thing that Fisher said that really hit home to me is that the success of a stock after its purchased has absolutely nothing to do with the history.
I mean, that does sound obvious, but think about it – we all evaluate history, and I think we should, but that doesn’t matter anymore – you need to keep an eye on the future.
The history will paint a great picture about certain things, but you need to focus on the future as well. He points out that if you’re buying a company at an under-valued price, you really need to spend the time evaluating if the company actually is undervalued or if it’s just not as valuable of a company anymore.
Don’t buy a marginal company unless it’s on its way to growing out of those underwhelming times.
7 – Does the company have outstanding labor and personnel relations?
Having good labor and personnel relations is so incredibly important and can save a ton of money for the company.
Think about it – good labor relations can help prevent strikes and good personnel relations can help prevent turnover.
It is often talked about how training is one of the largest costs to a company and this is a great way to minimize the amount of training that needs to be done.
A really cool point that Fisher brings up is that if the majority of business in the area are highly unionized and that business isn’t unionized, it likely means that they have great labor and personnel relations. He urges us to pay attention to how management treats their employees as that is a great way to evaluate this point.
8 – Does the company have outstanding executive relations?
The types of companies that will typically give you a great pathway to higher returns will likely have extremely strong leadership, and strong leadership is attracted to great opportunities.
Leadership and Executives thrive on merit-based accomplishments, pay and promotions rather than political based reasoning. In all honesty, they’re no different than us.
Have you ever been passed up for a promotion for someone else that is less qualified? It happens, and it can be very demotivating – but demotivation at the top, Executive level is a huge red-flag.
9 – Does the company have depth to its management?
Can the company grow outside of their existing management? I mean, you have to have some sort of succession plan at all times, because things don’t always go as planned.
This typically will not be an issue with larger companies, and Fisher specifically says that companies need to start developing their own C-level talent when they’re between $15 – $40 million in annual revenue.
Personally, I think that’s a little late to the game, but I’m going to go out on a limb and say that I think Fisher knows what he’s talking about…
It is so important that the management doesn’t micromanage and that there is delegation of authority. Without that, lower-level employees will never be empowered and never truly learn and grow into that top management quality employee.
Even more important is that they need to actively listen to ideas and treat them equally to their own.
Without these two aspects, you will truly never have a good pool of future leaders at your company – and that can be detrimental as an investor.
10 – How good are the company’s cost analysis and accounting controls?
This is absolutely essential to the success of any business.
If you do not know your costs, you will not know which products or processes are too costly, and you also won’t be able to identify what part of that product or process is too much.
For instance, maybe only one portion of the product is causing the entire product to be expensive. You won’t know that unless you thoroughly understand your expenses.
In addition to that, you won’t know what products are your very valuable products which will keep you from promoting them and maximizing profits. Typically you, as an investor, will only hear about bad accounting processes rather than good investing processes.
Fisher says that in general, if the company has good other processes, you can assume their accounting processes are good too unless you hear otherwise.
11 – 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 may be in relation to its competition?
Fisher focuses here on insurance costs being a key indicator as to how the company is doing compared to its competition.
The important thing is to try to identify the insurance costs and compare them to their competitors, rather than just looking at them as a whole. The insurance number is just a number – comparing it will give it context.
12 – Does the company have a short-range or long-range outlook in regard to profits?
I think this is something that a lot of people don’t think about it but it’s so important.
Maybe it’s because my 8-5 job is in Marketing, but your relationships are as important as anything in business.
Fisher talks about the importance of having strong relationships with suppliers and customers.
With suppliers, does the company drop a supplier quickly because a new supplier undercuts your current suppliers pricing? Or, do they pay a little more than they had to because they value the relationship and the strength of the supplier? Those are important things to consider.
Walmart has shown that the low-price model isn’t wrong for them specifically, but other companies will heavily rely on the relationship. At the end of the day, both can be right, and both can be wrong, and it’s up to you to decide if you think the company is treating everyone the right way.
Same goes to their customers – do they value their opinions and treat them correctly? If not, a customer will very quickly find someone else to get their products from.
13 – 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 shareholders’ benefit from this anticipated growth?
Fisher wants you to evaluate that if the company’s cash + future borrowing ability is high enough to cover any capital needed for future projects, and if not, then that could be a big problem.
The company needs to have the ability to grow heavily in the future, but you don’t want to just focus on growing 10-20% – aim much higher than that.
He recommends looking for some big potential gains, and if you don’t think that this company can accomplish those goals, then don’t invest.
14 – Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
This can be a major red flag when analyzing a company. When crap hits the fan, are the Executives up front and honest about what is going on? Or are they trying to hide it under the rug?
When, in any facet of life, has a situation gotten better by hiding it?
When someone has hid something from you, either personally or professionally, has it made you trust them more? No. It’s the same in business.
And if you can’t trust that company, then you should stop considering investing in them. Right. Now.
15 – Does the company have a management of unquestionable integrity?
Similar to the question above, this really calls into question the integrity of the management team.
Some red flags that Fisher points out include the potential of management owning land and then renting it back to the company at an above-market rate.
Another thing that Fisher points out that an investor should be aware of is that sometimes employees can get in with their vendors to get some sort of a “kickback” when they use that vendor.
These might seem like extremes, but they’re things that Fisher has brought up because he has seen them happen before. He’s just encouraging you to be on the lookout for these types of red flags when analyzing a company to invest in.
Fisher says that a company doesn’t have to have all 15 of these checkpoints for him to invest, but it’s a very strong list that he looks into every time that he is analyzing a look at a company.
I think this is a very strong checklist for you to consider, and even throw in a few more financial ratios, and I think you would have a truly comprehensive list to make sure you’re prepared and as educated as you can before investing in the stock!