Hi Geoff,
…Among the companies that you know well, which ones do you think would interest Phil Fisher today?
Sylvain
Wow. That's a hard question. It's a good question. But a hard one to answer. I know what companies I know well. And I think I know what companies would interest Phil Fisher. The problem is finding where those two lists overlap.
So – first of all – Phil Fisher was not concerned with price. I'm not saying he would've bought a dot-com company at the height of the bubble. But I am saying he didn't worry about price. If a stock had a P/E of 14 or 40, he might still be interested. I'm not interested in a stock with a P/E of 40.
Someone asked me the other day if I'd ever bought a stock with a P/E over 20. I'm not sure I have. I mean – I'm sure I have technically bought a stock with a P/E over 20. Because I've bought stocks in years where they had almost no earnings. The way math works, it's easy to get very big price ratios if you have a denominator close to zero. So when a company is basically just breaking even in a bad year – the P/E ratio could be astronomical. But I'm sure that's not what he meant. The question I think he was asking was whether I'd ever paid 20 times a company's record earnings.
I don't think so.
No. I'm pretty sure I've never paid 20 times a company's all-time high earnings. I think I'd remember doing that.
Well Phil Fisher was different. He would gladly pay 20 times earnings for the right company. For Phil Fisher, the right company was a fast grower.
Fisher was also very focused on a company's organization. Not just competitive advantages like Warren Buffett. But the actual people who worked at the company.
And while Buffett is interested in per share profit growth – wherever it comes from – Fisher was a much bigger believer in looking for organic sales growth. Not just growth through! buybacks.
I tend to be much more of a Buffett investor than a Fisher investor. I am probably happiest buying a somewhat slower growing company with a lower price than a faster growing company with a higher price.
In theory, this isn't very logical. Let's look at how many earnings $100 of my capital would buy at two different companies.
First is Coach (COH). Coach costs $74.06 a share. So $100 will buy you 1.35 shares of Coach. Coach has $3.25 in earnings per share. So, 1.35 shares would deliver $4.39 in earnings. We can think of $4.39 as the amount of present earnings your $100 can buy in Coach stock.
Now let's look at Dun & Bradstreet (DNB). Dun & Bradstreet costs $80.27 a share. So $100 will buy you 1.25 shares of Dun & Bradstreet. Dun & Bradstreet has $5.29 in earnings per share. So, 1.25 shares would deliver $6.61 a share in earnings. We can think of $6.61 a share in earnings as the amount of present earnings your $100 can buy you in Dun & Bradstreet stock.
Coach grew revenue per share 20% over the last five years. While Dun & Bradstreet grew revenue per share 9% a year over the last five years.
Let's imagine – just for the sake of argument – what would happen if Dun & Bradstreet and Coach both grew their earnings for the next five years at the same pace they grew them over the last five years.
This is how much earnings my same $100 would buy in each stock:
| Coach (COH) | Dun & Bradstreet (DNB) | |
| Today | $4.39 | $6.61 |
| 2012 | $5.27 | $7.20 |
| 2013 | $6.32 | $7.85 |
| 2014 | $7.59 | $8.56 |
| 2015 | $9.11 | $9.33 |
| 2016 | $10.93 | $10.17 |
In four years, my $100 investment in Coach would be earning nearly the same amount per year as my $100 investment in Dun & Bradstreet. And in five years, Coac! h's ear! nings would pass Dun & Bradstreet's earnings.
If Coach's growth prospects still looked good in five years, the stock might have a P/E of 20. Meanwhile, Dun & Bradstreet's growth might still be barely inching along. Actual sales growth at DNB is only around 3% a year. The per share growth is due to constant share buybacks. Check out Dun & Bradstreet's 10-year financial summary for evidence of the mammoth stock buyback they've done over the last decade. Shares outstanding have declined almost 40%.
Anyway, if DNB's organic sales growth was around 3% or so five years from now – the stock could easily have a P/E of 12. So, you could certainly imagine a scenario five years from now where Coach's price per share is $219 ($10.93 * 20) while Dun & Bradstreet's stock price is only $122 ($10.17 * 12).
I can't argue with that. It's certainly possible. Personally, I'm not at all sure a P/E of 12 makes sense for Dun & Bradstreet under any circumstances. If they simply diverted all the cash they use to buy back shares to paying out dividends instead – it's unlikely even a no-growth stock would have a dividend yield of 8%. This illustrates the lunacy of focusing on growth apart from earnings retention. You can't have it both ways. Either DNB is a 9% grower – which means you count the buybacks – or DNB is a 3% grower, but it pays out all its earnings in dividends.
I'm saying that the high quality of DNB's earnings – they entirely in the form of free cash flow – and the stable nature of their wide moat business means the stock should sell for 15 times earnings even when it's barely growing. I believe that.
What do I believe about Coach? It's hard to say. I don't believe – or at least I'm not willing to act on my belief – that Coach will grow its earnings by 20% a year over the next five years. It could. But even if it does accomplish that the market's view of growth from that point on will be key.
A simple way of looking a! t this is! to see that Coach is trading at a multiple that's around two times Dun & Bradstreet's multiple. What are the chances Coach's multiple will contract from the roughly 24 times earnings range to the roughly 16 times earnings range? And what is the chance that DNB's multiple will expand from around 12 times earnings to around 16 times earnings?
Both of those events are real possibilities. And I tend to see the investment world in that way. I think it's very possible $100 invested in Coach and $100 invested in DNB will produce similar amount of earnings five years from now – and those earnings may be valued in similar ways.
Coach's growth could falter before the five years is up. Or Coach could so wow investors in terms of its truly long-term growth prospects that the stock still fetches a P/E of 20 to 25 half a decade from now.
It would be hard for me to choose between those two stocks. Quantitatively it would be impossible. If forced to choose, I'm sure I'd pick Dun & Bradstreet. But that's a qualitative decision. I think I understand DNB's business – its competitive advantage – better than I understand Coach. That would be the only reason for picking DNB over Coach. I can't argue mathematically that Coach is an inferior stock at this price. In fact – by the numbers – Coach looks absolutely wonderful.
That's how I look at stocks. But that's not how Phil Fisher looked at stocks.
I don't think Phil Fisher would actually be attracted to either Dun & Bradstreet or Coach. I think he would consider both stocks outside of his circle of competence. In one of his books, he explains how he personally focused on manufacturing businesses with a significant technical aspect. Something scientific. That was his niche. Fisher didn't argue that his general approach couldn't be applied to food companies, retailers, media businesses, etc. He just didn't invest in those companies himself.
I'm sure Fisher would consider commercial databa! ses and l! uxury goods way outside his circle of competence. So, Fisher's approach might work for those stocks. But they wouldn't be stocks he'd buy personally.
Here are some stocks Phil Fisher might be interested in:
· Waters (WAT)
· Balchem (BCPC)
· Idexx (IDXX)
· II-VI (IIVI)
· Mesa Laboratories (MLAB)
· Masimo (MASI)
I don't know most of those companies very well. I probably know Waters the best out of that group.
Obviously, there are companies outside of Phil Fisher's area of focus – manufacturing with technical elements – that fit many of his principles.
Among really high profile companies, the three that stand out are:
1. Amazon (AMZN)
2. Netflix (NFLX)
3. Wells Fargo (WFC)
Of those 3, Amazon stands out the most. Jeff Bezos often seems to be channeling Phil Fisher. And I imagine that if Fisher were ever interested in a retailer it would be a retailer with Amazon's attitude about technology, customers, growth, and the long-term. More than anything though it's Amazon's constant internal push to develop new sales and especially new ways to serve existing customers without being prompted by outside forces that makes me think it's a company Phil Fisher would be very interested in.
Fisher liked companies that had a philosophy of growth. Something internal to the organization that caused it to seek ways to grow sales, win new customers, develop new products. Fisher obviously wanted a great organization in an industry with great long-term prospects. But I think a lot of growth investors focus more on the latter issue than Fisher would. I know they don't focus enough on the first issue. Fisher wanted a great organization first and foremost.
I'm not sure any of the stocks I've mentioned in this article are necessarily good buys. The one exception is Wells Fargo. I'm never comfortable calling a bank entirely safe. So I'm less sure about suggesting any financial! stock as! a good buy than I am about stocks in most industries. But if you look at what Wells Fargo has achieved and what they are likely to achieve over the next ten years or so and then consider the price you are paying for the stock today – I think it's pretty hard to come up with reasonable assumptions that tell you Wells Fargo is too expensive right now. Maybe you don't feel the same way I do about the organization and the opportunities in cross-selling products to existing customers. That's fine. But if I had to pick one stock I mentioned here as a stock worth investigating as a long-term buy – and long-term is the only kind of buy Phil Fisher believed in – it's Wells Fargo.
Waters is not especially cheap. But that's also an interesting company. It might be a bit slow growth – a lot of the EPS growth you see there is from buybacks – for Phil Fisher's taste. But it seems like a perfectly good company to me.
There is one stock in one industry that is pretty far afield from the kind of companies Phil Fisher actually invested in during his lifetime that I'm definitely interested in and I actually think lines up pretty well with a bunch of Fisher's principles.
That stock is DreamWorks Animation (DWA).
I won't try to defend DreamWorks as a Phil Fisher stock. I'm sure a lot of you are scratching your heads right now about that name and what it has to do with Phil Fisher. If you are – I'd suggest learning more about DreamWorks.
It's no use reading the financials. This is a movie studio. It makes a couple movies a year. You won't find a pattern in the summary financial data.
But I think if you learn about the management, organization, employees, their attitude toward technology and growth and so on – I think you'll find DreamWorks to be surprisingly in sync with Fisher's philosophy.
Which brings me to my most important point. Just about all the stocks I talked about are pretty big stocks. Because people think of Fisher a! s being s! ynonymous with world class quality they tend to look at bigger stocks than Fisher himself usually did.
The important thing is taking Phil Fisher's philosophy and applying it to the industries you know best. It's Fisher's general approach that matters. Not necessarily his focus on any one specific industry.
And try to apply Fisher's ideas to the smallest stocks you can find. Everyone is looking for high-quality companies with good long-term growth prospects among the biggest companies out there.
The best place to apply Fisher's ideas is somewhere that's considered highly speculative. If other investors are buying and selling some stocks without regard to the quality of the businesses – that's the place you'll get the most use out of Fisher's ideas.
But the most important part of Fisher's philosophy is the holding. You need to buy a stock with the intent of holding it forever. You need to wait 3 years before you'll know if the stock is panning out.
I'm serious about the 3 year part. Fisher mentions 3 years as the amount of time you should wait if you like a company, buy its stock, and then watch its stock go nowhere. He says you should wait 3 years before you call it quits.
That's simple advice. But it's probably the part people have the hardest following.
Ask Geoff a Question About Phil Fisher
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