Phil Fisher growth investors ch. 1- 3 Flashcards
How would bonds perform in a recession
Temporarily outperform stocks
But a train of major deficit producing actions will then be
Triggered that will cause another decline in true purchasing
Power
Research and development, how often is it profitable?
How long does a successful project take to be profitable?
Profitable a minority of the time
Takes 7 to 11 years to add to shareholder value
3 characteristics of outstanding management
1 continually grow sales and profits in important areas
2 bring long term plans to completion
3 management doesn’t allow long term planning to prevent
Vigilance in day to day tasks of ordinary business
Scuttlebutt: competitors, research studies
Go to 5 companies in an industry and ask them intelligent
Questions that point out the strengths and weaknesses
Of other 4 competitors
Find research studies about customer and vendor opinions
Of companies done by universities and government
Scuttlebutt: trade organizations
Must make clear source of info will never be revealed
And live up to this policy
Scuttlebutt: former employees
Provide inside view of employer’s strengths and weaknesses
Must take into account why employees left company to
Determine their degree of prejudice
Scuttlebutt: final step
Contact company officers to fill in the missing pieces
Fifteen points to look for in a common stock: #1 Does the company have products of services with sufficient market potential to make possible a sizable increase in sales for at least several years?
Not possible to make the greatest possible gains from steady
Or declining sales or temporary increase in sales
Good management required to have continuos growth in
Sales, luck only lasts for so long
Ex. Microsoft sold computers and huge profits were made
Until most households had computers
Fortunate and able
Companies where management is good and can adapt
But the highest growth results from luck
Ex. Alcoa managers couldn’t envision the future of the market
But we’re able to take advantage of opportunities to grow
The company
Fortunate because they are able
Management is so good they can create the market for
Products
Ex. DuPont
What long run trend must an investor judge relating to the potential of significantly increased sales of goods and services?
Investor must correctly judge the long run sales curve of
Company
15 points to look for In a common stock: #2 does management have a determination to continue to develop products or processes that will still further increase total sales potentials when growth potentials of currently attractive product lines have largely been exploited?
Constant stream of research and development to improve
Old products and develop new ones
Best if newly developed products from R&D have business
Relationship with scope of company activities
What is Best for companies with divisions for different products to have?
A research center around each of these divisions
15 points to look for In a common stock: #3 How effective are the company’s research and development efforts in relation to its size?
Bad when management prematurely stops long term R&D
Projects and has history of doing this (waste of money)
Beneficial when the government covers the costs of
R&D, good for investors
3 other ways to discover how companies demonstrate effect deployment of research and development
1 learn number of employees that hold Science degrees
2 use scuttlebutt to learn how companies engage in research
Activities
3 in 10 year period if company produced a good flow of
Profitable new products they will continue to do so if they
Operate under same general method
15 points to look for in a common stock: point 4 Does the company have an above-average sales organization?
Can find this out from scuttlebutt asking customers and
competitors
Find organizations with aggressive distribution and a constantly
Improving sales organization
Ex. IBM salesmen spends a third of his time training in the company sponsored schools
15 points to look for in a common stock: point 5 Does the company have a worthwhile profit margin?
Sales are of value when they grow profits
Should study profit margins over a series of years for different
Companies across industries
What happens to profit margins of mediocre companies (those with smaller profit margins) during the business cycle?
2) Are the greatest long range investment profits obtained from investing in these companies?
They always increase their profit margins by a greater percentage
In good years than lower cost companies
Profit margins decline more rapidly in bad years, 2) therefore
The greatest long range profits are not obtained from investing
In these companies
It becomes evident that nearly all companies have broader profit margins and greater total dollar profits in years when…
An industry is unusually prosperous
When can companies with marginal profit margins become potentially good investments?
When efficiency and new products take it out of the marginal
Category
Activities (such as sales development and R&D) are justified to
Decrease profit margins currently to generate future profits
15 points to look for in a common stock: point 6 what is the company doing to maintain or improve profit margins?
Some companies are in the fortunate position of maintaining
Profit margins merely by raising prices (industries w/high demand
Or competitors selling prices increased)
Companies do this using capital improvement or product
engineering departments
What is the sole function of maintaining capital improvement or product engineering departments?
Design new equipment that will reduce costs and offset rising
Trend of wages
How to use scuttlebutt/ inquiry to learn of the improvement of profit margins ?
Give attention to companies new ideas for cutting costs and
Improving profit margins, through direct inquiry of company
Personnel
What generally causes profit margins to shrink in our economy?
Competitive production capacity increases supply, so when
Costs increase they can’t be passed on as price increases
15 points to look for in a common stock: point 7 does the company have outstanding labor and personnel relations?
Companies with lower rates of labor turnover treat their
Personnel better, have better management, save on training costs
The size of the waiting list of job applicants for company
Against others in same locality
Companies with good labor relations usually are ones that…
Settle grievances quickly
How do wages signify good company labor and personnel relations?
The companies that make above average profits and pay
Above average wages in area located have good labor relations
Significance of strikes
Strikes are a sign of poor labor relations in the company
Significance of how good managements treat personnel?
Management is good when they can make an ordinary employee
Feel wanted and a part of the team
Also when they are concerned about the financial well being
Of their employees families
15 points to look for in a common stock: point 8 does the company have outstanding executive relations?
Companies with the greatest investment opportunities will be
Ones in which executives have confidence in their presidents
And boards/chairman
This means that from the lowest levels on up there is a feeling
That promotions are based on ability not factionalism
Good Executive relations: salaries
Salary adjustments are reviewed regularly so executives feel
Increases are merited
Salaries are in line with the standard of the industry and locality
In a good company how will managers treat outside talent?
Management will only bring outsiders into anything other than
Starting jobs only if there is no possibility in promoting anyone
Already in the organization
Top management will recognize that wherever human beings work together, some degree of factionalism and human friction will occur. How should management handle this?
They should not tolerate those who do not cooperate in team
Play
15 points to look for in a common stock: point 9 Does the company have depth to its management?
The company needs to have someone who can replace the
Outstanding One man manager
Good when lower levels of management are given autonomy
To make their own decisions
What’s an important characteristic for top management to have to show that they have depth?
Whether top management asses suggestions from personnel
Even if they carry adverse criticism of current management
Practices
15 points to look for in a common stock: point 10 How good are the company’s cost analysis and accounting controls?
Long term success depends of companies ability to break down
Overall costs with sufficient accuracy
Shows cost of each small step in its operation
Management’s knowledge of Product costs
Management must have a precise knowledge of the true cost
Of each product in relation to others
This allows management to establish pricing policies that
Insure the maximum obtainable overall profit consistent with
Discouraging undue competition
How to learn about a company’s cost accounting?
What should the careful investor note?
Scuttlebutt: talking with company personnel
The careful investor should note that there are limits to finding this
Out
15 points to look for in a common stock: point 11 Are there other aspects of the business somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
In retail: companies skill at handling real estate matters
Companies that have lower insurance costs compared to
Competitors broaden their profit margins
How should insurance matters be evaluated .
Through ratios and discussions with knowledgable insurance
People
Index of insurance costs in relation to coverage points out
Clearly how well companies in a given field are run
Significance of patents
For large companies a strong patent position is usually a point
Of additional strength rather than basic strength
Patents are usually only able to block off a few rather than all
The ways of accomplishing the same design process
What 4 attributes do companies need to depend on more than patents in a competitive market?
1 manufacturing know how
2 sales and service organization
3 customer good will
4 knowledge of customer problems
Large companies that depend chiefly on patent protection for the maintenance of their profit margin is usually…
More a sign of investment weakness than strength
When the patent protection is no longer there the company’s
Profit may suffer badly
Patent positions for small companies
Should be closely scrutinized by the investor
Without patents it’s products might be copied by large
entrenched enterprises,
which could use their distribution channels and customers to put
the small company out of business
15 points to look for in a common stock: point 12 Does the company have a short rage or long range outlook in regard to profits?
(Note: Use scuttlebutt to favor the long term companies)
Companies with great customer care may show lower profits
In the near term but higher profits over the long term
Companies may pay suppliers a premium for raw materials
So when the market gets tight, they have better access
15 points to look for in a common stock: point 13 In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares outstanding will largely cancel the existing shareholders’ benefit from this anticipate growth?
Important that the company’s cash and further borrowing
Ability is sufficient to take care of capital needed to exploit
Prospects in future
Avoid companies that have track record of diluting their shares
When calculating the real number of common shares outstanding it is important to…
Consider all senior convertible issues have been converted
And all options and warrants have been exercised
15 points to look for in a common stock: point 14 Does management talk freely to investors about its affairs when things are going well, but “clam up” when troubles and disappointments occur?
How management reacts to setbacks is valuable to investor,
Investor should avoid companies where management tries to
Withhold info/bad news
If management clams up, they may not have an effective
Program worked out to solve the problem
15 points to look for in a common stock: point 15 Does the company have a management of unquestionable integrity .
Not good when relatives are put on payroll with salaries far
Above the normal work performed
Or put properties they sell or rent to Corporation at above Market rates (hard to detect from small companies)
Stock options
Management can enrich themselves far beyond what they
Deserve at stockholder’s expense
What is the only real protection against management abuses?
Confine investments to companies where the managements of
Which have highly developed sense of trusteeship and moral
Responsibility to their stockholders
