Tags: growth | investing

What Buffett Learned from the Father of Growth Investing

By    |   Thursday, 07 Aug 2008 11:11 AM

Warren Buffett has told audiences that his investment style is 85 percent Benjamin Graham and 15 percent Philip Fisher.

While many investors are familiar with Graham, Buffett's professor at Columbia University, few have studied the work of Fisher. (Fisher's son, Ken Fisher, today runs Fisher Investments.)

Phil Fisher wrote "Common Stocks and Uncommon Profits" in 1958, a book which defined his investment strategy. His time horizon is truly long-term, saying that the best time to sell a stock was "almost never."

As an example, he held shares in Motorola for almost 50 years — buying in the mid-1950s and holding the position until his death in 2004.

Considered a pioneer in growth investing, Fisher focused his analysis on companies capable of growing sales. After passing this test, his preferred fundamental measure of a company's potential was net margin, that is, the percentage of revenue that ends up in the bottom line of an income statement as profit.

In researching this week's screen, I found that Fisher's strategy would have been profitable during this year's bear market.

Following the rules set out in this screen and reviewing the portfolio once a month would have led to a gain of 10 percent this year, while the stock market as measured by the S&P 500 has fallen by more than 10 percent.

The specific criteria are very simple to define:

• Sales increasing each year for the past five years

• A rate of the increase in sales over the past three years greater than the industry average over that time

• Net margins increasing for the past five years and currently exceeding the industry average

• Positive earnings estimates for the current year and next year

• Financial stocks were excluded due to the continuing turmoil in that sector

Nine stocks made my Phil Fisher-growth list:

Cal Dive International (DVR) provides construction solutions in the offshore oil and natural gas industry. Analysts forecast average earnings growth of 35 percent a year for the next five years, but the stock trades with a P/E ratio of only 12 at a recent price of 10.49. With offshore drilling now being favored by both presidential candidates, DVR is likely to see even larger earnings gains.

Esterline Technologies (ESL) is an airplane parts supplier. Even as airlines cut back on the number of planes they fly, ESL should profit from increased maintenance requirements. Recently trading at 49.52.

MEMC Electronic Materials (WFR) trades at only nine times next year's projected earnings. The company has a 36 percent return on equity, Buffett's favored fundamental measure. This places it among the best managed companies in the industry, with a well below-average P/E ratio. Recent price: 44.15.

OmniVision Technologies (OVTI) makes components for cellphone cameras, security devices, and other imaging technologies. Ken Fisher's investment company owns almost 5 percent of OVTI. The stock recent traded at 11.46.

Super Micro Computer (SMCI) sells high-powered computer servers. Insiders own more than a quarter of the available shares in this company, a strong vote of confidence in the future. At a recent price of 7.93, SMCI trades at a P/E ratio of 13, half its projected growth rate.

Superior Energy Services (SPN) was one of 18 U.S. energy companies selected by Standard & Poor's for its list of 300 Global Challengers, consisting of mid-sized companies that show the "highest growth characteristics." SPN has seen earnings growth of 80 percent a year over the past five years. Recent price: 48.08.

TechTeam Global (TEAM) provides IT professionals to small- and medium-sized companies. At a recent price of 8.84, TEAM is trading below its book value of 9.30 a share. This makes the small company a potential takeover target for larger firms in the outsourcing industry.

Volcom (VLCM) is in the tough market of designing and selling stylish clothes to young men and women and children. In a notoriously faddish business, VLCM consistently delivers earnings that exceed estimates and has a net margin of more than 11 percent, among the best in the industry. Recent price: 19.45.

Western Digital (WDC) Despite recently missing earnings estimates, WDC is still projected to grow at 14 percent a year for the next five years. Trading near 29.09, the stock has a P/E ratio under 8, less than half the industry average.

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MichaelCarr
Warren Buffett has told audiences that his investment style is 85 percent Benjamin Graham and 15 percent Philip Fisher. While many investors are familiar with Graham, Buffett's professor at Columbia University, few have studied the work of Fisher. (Fisher's son, Ken Fisher,...
growth,investing
711
2008-11-07
Thursday, 07 Aug 2008 11:11 AM
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