The Fisher Approach: The Price/Sales Ratio — and Beyond

Every other issue of The Validea Hot List newsletter examines in detail one of John Reese’s computerized Guru Strategies. This latest issue looks at the Kenneth Fisher-inspired strategy, which has averaged annual returns of 13.9% since its July 2003 inception vs. 6.0% for the S&P 500. Below is an excerpt from the newsletter, along with several top-scoring stock ideas from the Fisher-based investment strategy.

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Fisher: Time To Think About Margins

With the bull market around its halfway point, in his estimation, Kenneth Fisher is focusing on “big, fat stocks” — that is, large-caps with fat gross profit margins.

“It works because fat gross margins offer a firm more discretion to fine-tune its future. Invest in more research than peers do. Or market more. Or afford more capital expenditures. Or, or, or!” Fisher writes in his latest Forbes column. “It renders more reliable future earnings — the very theme my research shows that later-stage bull markets love.”

By “fat”, Fisher says he means “above 50% and higher than the industry’s average”. He does note that the strategy didn’t work in the last bull market, “I think because that bull was unusually, and prematurely, truncated”. But, he says, “that boosts the odds this bull market ends more normally. In this case gross and fat mean beautiful.” He looks at a handful of stocks he’s high on that have high gross margins. Among them: tech giant Intel, which has a gross margin of 58 percent.

Fisher on an “All or Nothing” 2014

With most forecasters expecting moderate gains or minimal losses for stocks in 2014, Kenneth Fisher says we’re likely to get returns that are more extreme — likely on the upside.

In his latest Forbes column, Fisher says it’s hard to find credible strategists predicting more than a 13% gain for the year, or worse than a 6% decline. Bears have seen their arguments fail time and time again and are no longer predicting disaster, he says, while bulls are worried the market rose too far, too fast last year and is due for a correction. But, says Fisher, “No one consistently predicts corrections or ever has, so that’s a risk always best ignored. At best a bear market might be partially avoided, but trying to do anything other than ride through a correction will likely get you whipsawed. You can’t time a correction. Period.”

With most predicting returns in that 13% to -6% range, Fisher says “that 19-percentage-point spread is what is now discounted into pricing. Hence the market is most likely to continue booming, up 20%-plus, or officially correct, down more than 10%. All or nothing, embarrassing basically everyone.” He says it’s more likely to surprise on the upside, and discusses several stocks he’s high on. Among them: IBM.

Validea’s Ken Fisher-inspired portfolio is up 13.3% annualized since its mid-2003 inception vs. less than 6% for the S&P 500. Check out its holdings here.

Fisher: Don’t Believe The 2014 Consensus

While consensus estimates have stocks gaining about 6% in the coming year, top strategist Kenneth Fisher thinks that figure will be much higher.

“Yes, this bull market has moved well past pessimism,” Fisher writes in his latest Forbes column. “But residual skeptics still temper the euphoria that classically death-knells stocks. More standard measures of optimism tend to hit halfway through a bull — and that should be sometime in 2014.”

Fisher sees a big positive for the economy in what many others fear will be a negative: the tapering of the Federal Reserve’s quantitative easing plan. “QE isn’t expansive or bullish — just the reverse,” he contends. “When it ends the party finally gets going good, as yield spreads widen and bank lending, money supply and economic growth finally take off — the exact U.K. experience after they ended their dismal version of this idiocy.” Fisher says America’s money supply has grown more slowly during the current expansion than it has in any other we’ve experienced. “That loosens soon,” he says. “Enjoy the ride.”

Validea’s Ken Fisher-inspired portfolio is up 13.9% annualized since its mid-2003 inception vs. less than 6% for the S&P 500. Check out its holdings here.

Fisher Says Bull Far From Done

Top strategist Kenneth Fisher says the bull market has a long ways to run.

“We’re moving slowly into the back half of the bull market,” Fisher tells Think Advisor. “[Great stock picker] John Templeton said bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. We’ve got one foot in skepticism and the other in optimism. Everything takes a long time in bull markets. We’re five years into this one and haven’t reached optimism yet. That means we’ve got years to get to euphoria. Standard corrections can pop up at any point, but we have a long period of bull market to go because we haven’t got past all the skepticism.”

Fisher also talks about why he wants the Federal Reserve to end its quantitative easing program, and why he doesn’t think a recession is coming anytime soon. He’s high on “big, high quality” stocks like “pharmaceuticals; big, boring names in technology; a little energy; consumer staples. Midsize banks and [non-European] foreign banks look pretty good — banks that are in the business of taking in deposits and making loans.” He also says he thinks emerging market and European stocks, outperformed by U.S. stocks so far in the bull market, are likely to make up some of that ground going forward.

Validea’s Ken Fisher-inspired portfolio is up more than 14% annualized since its mid-2003 inception vs. less than 6% for the S&P 500. Check out its holdings here.

Fisher: End of QE to Boost Banks

Fears continue to hover over big banks, but top strategist Kenneth Fisher says that an end to the Federal Reserve’s quantitative easing policies will actually mean a boost for bank performance.

“Banking’s core business is simple: Take in short-term deposits, make long-term loans,” Fisher says in his latest Forbes column, adding that he thinks QE has been a hindrance, not a help, to the economy. “The spread between short- and long-term interest rates pretty well reflects future gross operating profit margins on new loans (effectively cost versus revenue). The bigger the spread, the more profitable future loans will be, all else being equal. Ending so-called QE steepens that spread by definition, since it stops the Federal Reserve’s buying of long-term debt (thus lowering future long-term debt prices and pushing rates higher). As the spread rises, so will bank profitability on new loans, and banks’ eagerness to lend — along with overall loan revenue — will rise in lockstep.”

Fisher also says that long-term rates are highly correlated between developed and developing markets. That means that countries that currently have the lowest spreads should get the biggest boost from rate increases, which has Fisher favoring markets like Chile, where spreads are extremely low. Overall he’s high on a number of banks that he discusses in the article, including Swedbank.

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Fisher Sees Bargains Across The Pond

While the British stock market has been much maligned in recent years, top strategist Kenneth Fisher sees opportunities in the U.K.

“From an investor standpoint Great Britain has been plagued by snipes who have bad-mouthed the U.K — which represents 9% of the world stock market — for years,” writes Fisher, a reference to the bird that will be a target for British hunters when bird-shooting season begins in a couple weeks. “Skeptics complain about its being too much like America, with all of the bad parts and none of the good ones: internal problems, no growth, no hope.”

Fisher takes a contrarian view, however. “Today even [Great Britain's] biggest stocks sell for relative bargains,” he says. “I think the time is ripe for bagging great British franchises.” He looks at six U.K. stocks. Among them: drug giant AstraZeneca.

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