The market blip that occurred earlier this month, sending shock waves through the much of the investment community, didn't faze legendary investor Ken Fisher. In a recent USA Today article, the market guru advises, "If you're fully invested, sit on your hands. Hard! For cash holders this action prescribes buying. Always stay cool. Fight any urge to sell. It's all signaling more new highs ahead."
Fisher, who leads the money management firm Fisher Investments (approximately $70 billion in managed assets), goes on to say, "During corrections, media and market mavens invariably search for justifying causes. What made it happen? Why? By the time they agree, it's all over."
So how might this market expert guide today's investor? In his article, Fisher advises level-headedness. The February sell-off, he says, "isn't how bear markets start." For now, he argues, "patient, diversified, owners of big, high-quality stocks should see happier times ahead in the bull market's next up-leg."
The Fisher Strategy
In 2003, I launched a Fisher inspired model based on the strategy outlined in his book, Super Stocks. While Fisher has stated that he doesn't follow this exact investment strategy anymore, I found Fisher's investment track record and the merits of the strategy worthy enough to be included in one of my stock-screening models on Validea . The Fisher model, as I have captured it, is rooted in the belief that focusing too heavily on a stock's price-earnings ratio is misguided since earnings can fluctuate significantly from year to year and can be subject to accounting gimmicks. Management decisions to replace plant and equipment or changes in accounting methods, for example, can throw off earnings.
Fisher believed that sales, on the other hand, were a far better gauge of underlying business strength. Specifically, he found that sales of what he called "super companies"-those capable of growing their stock price by between 3 and 10 times in value over a period of 3 to 5 years-rarely decline significantly.
In his book, Fisher explains his thinking on this issue: "To buy stocks successfully, you need to price them based on causes, not results. The causes are business conditions-products with a cost structure allowing for sales. The results flow from there-profits, profit margins and, finally, earnings per share."
As a student of investor psychology and market history, Fisher strongly believed that investors tend to raise expectations to unrealistic levels for companies that have periods of strong early growth. But when these favored companies experience a setback such as reporting earnings below analysts' estimates (during earnings season, for example), investors can overreact and send the stock price plummeting. Fisher, however, believed this to be part of a company's maturation process, and that a strong management team would be able to identify and correct any issues. The investor able to target such companies, according to Fisher, could make a bundle.
Price-to-Sales Ratio ( PSR )
Fisher defined PSR as the total market value of a company (total number of shares multiplied by stock price, or market capitalization) divided by the last 12 months' corporate sales. By looking at sales, said Fisher, an investor could find opportunities in the form of companies that are operating at a loss and have low PSRs but still have good prospects for growth (such companies wouldn't have P/E ratios as earnings would be less than zero).
Price-Sales Ratio Metrics
The following are the PSR benchmarks that Fisher outlined in his book (and are the same values we use in our Fisher-based stock screening model):
For non-cyclical and technology stocks:
Best case: PSR of 0.75 or below
Good value: PSR of above 0.75 and below 1.5
For cyclical stocks:
Best case: PSR of 0.4 or below
Good value: PSR greater than 0.4 and less than or equal to 0.8
Looking Beyond the PSR
Since 2003, I have been tracking a portfolio that consists of the top rated stocks based on the strategy I extracted from Super Stocks. The ten stock monthly re-balanced portfolio has returned 11.8% per year compared to 7.2% for the S&P 500. As of this writing, it puts this portfolio in the top half of all portfolios I track on Validea.
Below is a table containing the top scoring stocks based on the model. All of these positions are currently held in the portfolio although holdings are subject to change as the portfolio's set re-balancing is scheduled to take place on March 9th, 2018.