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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Fisher-Inspired “PSR” Strategy Still A Market-Beater

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 13.5% since its July 2003 inception vs. 5.3% 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.

Taken from the July 19, 2013 issue of The Validea Hot List

Guru Spotlight: Kenneth Fisher

For decades, the price-to-earnings ratio has been the most widely used valuation measure for stock investors, and a key tool in the arsenals of many of the gurus I follow. While legendary investors like Benjamin Graham, Peter Lynch, and John Neff all used the ratio differently, they and many others agreed that the ratio itself was a key to finding bargain-priced stocks. The investing public and media seems to share their view, with the P/E ratio having long been the only valuation metric that most newspapers include in their daily stock listings.

But in 1984, Kenneth Fisher sent a shockwave through the P/E-conscious investment world. Fisher — the son of Phillip Fisher, who is known as the “Father of Growth Stock Investing” — thought there was a major hole in the P/E ratio’s usefulness. Part of the problem, he explained in his book Super Stocks, is that earnings — even earnings of good companies — can fluctuate greatly from year to year. The decision to replace equipment or facilities in one year rather than in another, the use of money for new research that will help the company reap profits later on, and changes in accounting methods can all turn one quarter’s profits into the next quarter’s losses, without regard for what Fisher thought was truly important in the long term — how well or poorly the company’s underlying business was performing.

While earnings can fluctuate, Fisher found that sales were far more stable. In fact, he found that the sales of what he termed “Super Companies” — those that were capable of growing their stock price 3 to 10 times in value in a period of 3 to 5 years — rarely decline significantly. Because of that, he pioneered the use of a new way to value stocks: the price-to-sales ratio (PSR), which compared the total price of a company’s stock to the sales the company generated.

Fisher’s findings — and his results — helped make the PSR a common part of investment parlance, and helped make him one of the most well-known investors in the world. (He is a perennial member of Forbes’ list of “The 400 Richest Americans”, his money management firm oversees tens of billions of dollars, and he is one of Forbes’ longest running magazine columnists.) The common sense, mostly quantitative approach he laid out in Super Stocks also caught my attention, and led me to create my Fisher-based Guru Strategy.

It’s important to note that today, Fisher says his approach to investing has evolved quite a bit since Super Stocks. The key to winning big on Wall Street is knowing something that other people don’t, he believes, and when too many people became familiar with PSR investing, he says he needed to find other ways to exploit the market.

So why have I continued to use my Super Stocks-based model? Two reasons: First, Fisher’s publisher reissued the book in 2007, with the same PSR focus. Second, the strategy flat out works. Since its July 2003 inception, my 10-stock Fisher-based portfolio has gained 256.4%, or 13.5% annualized, while the S&P 500 gained just 68.2%, or 5.3% annualized (figures through July 15). That makes it one of my most successful long-term strategies.

Price-to-Sales and “The Glitch”

Fisher is a student of investor psychology, and his observations about investor behavior are what led to his PSR discovery. Often, he found, companies will have a period of strong early growth and become the darlings of Wall Street, raising expectations to unrealistic levels. Then, they then have a setback. Their earnings drop, or continue to grow but simply don’t keep pace with Wall Street’s lofty expectations. Their stocks can then plummet as investors overreact and sell, thinking they’ve been led astray.

But while investors overreact, Fisher believed that these “glitches” are often simply a part of a firm’s maturation. Good companies with good management identify the problems, solve them, and move forward, and as they do the stock’s price begins to rise again. If you can buy a stock when it hits a glitch and its price is down, you can make a bundle by sticking with it until it rights the ship and other investors jump on board.

The key in all of this was finding a way to evaluate a firm when its earnings were down, or when it was losing money (remember, you can’t use a P/E ratio to evaluate a company that is losing money, because it has no earnings). The answer: by looking at sales, and the PSR.

According to the model I base on Fisher’s writings, stocks with PSRs below 1.5 are good values. And the real winners are those with PSR values under 0.75 — that’s the sign of a Super Stock. To find the PSR, Fisher says to take the total value of a company’s stock, i.e. its market cap (the per-share price multiplied by the number of shares outstanding). We then divide that number by the firm’s trailing 12-month sales.

One note: Because companies in what Fisher called “smokestack” industries — that is, industrial or manufacturing type firms that make the everyday products we use — grow slowly and don’t earn exceptionally high margins, they don’t generate a lot of excitement or command high prices on Wall Street. Their PSRs thus tend to be lower than those of companies that produce more exciting products, Fisher said. He adjusted his PSR target for these firms, and the model I base on his writings looks for smokestack firms with PSRs between 0.4 and 0.8; it is particularly high on those with PSR values under 0.4.

Beyond the PSR

While the PSR was key to Fisher’s strategy, he warned not to rely exclusively on it. Terrible companies can have low PSRs simply because the investment world knows they are headed for financial ruin.

Other quantitative measures Fisher used include profit margins (he wanted three-year average net margins to be at least 5%; the debt/equity ratio (this should be no greater than 40%, and is not applied to financial firms); and earnings growth (the inflation-adjusted long-term EPS growth rate should be at least 15% per year).

Fisher also made an interesting observation about companies in the technology and medical industries. He saw research as a commodity, and to measure how much Wall Street valued the research that a company did, he compared the value of the company’s stock (its market cap) to the money it spends on research. Price/research ratios less than 5% were the best case, and those between 5 and 10% were still indicative of bargains. Those between 10 and 15% were borderline, while those over 15% should be avoided.

One of the Best

The variety of variables in my Fisher-based model are a big part of why I think it continues to work, long after the PSR has become a well-known stock analysis tool. While it uses the PSR as its focal point, it also makes sure firms have strong profit margins, earnings growth, and cash flows, and low debt/equity ratios. That well-rounded approach helped it get through one of the worst periods for the broader market in history and stay far, far ahead of the market over the long haul — all while the PSR has been a well-known investing tool. I expect this solid approach will continue to pay dividends over the long haul.

Now, here’s a look at the stocks that currently make up my 10-stock Fisher-based portfolio.

Lear Corporation (LEA)

Zagg Inc. (ZAGG)

HollyFrontier Corp. (HFC)

Telecom Argentina (TEO)

Ascena Retail Group (ASNA)

Bridgepoint Education (BPI)

Royal Dutch Shell Plc (RDS.A)

USANA Health Sciences, Inc. (USNA)

Williams-Sonoma Inc. (WSM)

Signet Jewelers Ltd. (SIG)

Fisher: Don’t Worry, Keep Buying

Kenneth Fisher says that investors need to stop worrying, and that the bull market is only halfway done.

“Scandals in Obama-nation; China’s tepid growth; Europe’s lingering woes; stocks up too much, too fast; rising long-term rates; when QE ends–or doesn’t! Fill in your own five worries. Then there are the perennial faves: debt, inflation, terrorists, the Middle East, creeping socialism, creeping Obamaism–endless creepyisms,” Fisher writes in his Forbes column. “[But] as summer’s dog days melt into a daze, please remember that ubiquitous worries usually melt away, too.”

Fisher notes that earlier this year, the “fiscal cliff” and sequestration were the big worries, but now they are “starting to feel like distant memories. Worrying is normal, and we have a tough time disciplining our minds to resist it. But in my view it’s pointless. Any reputable doctor will tell you worrying is bad for your health, and that holds true for portfolios as well.” He says to remember the words of Sir John Templeton: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Today, Fisher says, “We have one foot planted firmly in skepticism with the other straddling over to optimism. That means we’re about halfway through the bull market — with about four more years to go. Until the fret-o-meter drops further and we get much more optimistic, there is little to worry about.”

Fisher says Fed-tightening worries and “Bernanke anxiety” both make him bullish. He highlights several stocks he likes, including energy giant Chevron.

Fisher: Don’t Be Myopic; Bull Far From Over

Kenneth Fisher thinks we’re still in the middle of a bull market, and that most investors are thinking too myopically — and don’t understand quantitative easing at all. Fisher tells Bloomberg that the bull market hasn’t yet transitioned into the “optimism” stage that signals the final stage of a bull run. In fact, he says the notion that we’re in the middle part of a bull market is a “really impossible concept for most people to get” given all the worries and pessimism out there. Fisher says most people haven’t come to grips with the idea that the 2008-09 financial crisis was likely a once-in-a-lifetime event, and instead are allowing their fears of the past to dictate their actions.

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