AAII Stock Screens

The Philip Fisher Approach to

Screening Common Stocks for
Uncommon Profits
By Wayne A. Thorp, CFA

Philip Fisher got his start

in investments in 1928 as a statistician for a bank underwriting

securitiesand quickly lost a
significant amount of money in
the 1929 stock market crash.

Soured by the experience, he started his own investment

counseling firm in the early 1930s, following an investment
philosophy of selecting deeply researched companies with
strong long-term growth prospects and holding them through
the gyrations of the economic cycle.
Fisher stood out as one of the first money managers
to focus on qualitative factors instead of quantitative ones.
He examined factors that were difficult to measure through
ratios and other mathematical formulations: the quality of
management, the potential for future long-term sales growth,
and the firms competitive edge.
Although Fisher focused on the qualitative characteristics
of a company, he was first and foremost a growth stock investor. He felt the greatest investment returns did not come
from the purchase of stocks that were undervalued, since
a stock that is undervalued by as much as 50% would only
double in price to reach fair market value.
Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater
than the overall market over a long period of time.
Furthermore, Fisher did not seek companies showing
promise of short-term growth due to cyclical events or onetime factors. He felt that the timing was too risky and the
promised returns too small.
Over the years that followed, Fisher penned three books
October 2008

regarding his investment philosophy. They

were republished as a single work: Common
Stocks and Uncommon Profits and Other
Writings by Philip A. Fisher (Wiley, 2003).
Fisher Screen
Even though qualitative factors were high on Fishers
list, his writings provided enough detail to establish some
basic quantitative screens. AAIIs Philip Fisher screen seeks
to highlight growth stocks meriting further in-depth analysis
with:
Consistently strong profitability;
Consistent sales growth;
Growth exceeding industry norms;
Little or no dividend payout; and
Reasonable price compared to future growth prospects.
You will find the exact screening criteria for the Philip
Fisher Screen at the end of this article.
Screen Performance
Each month, the AAII.com Web site provides a list of
the companies passing the Philip Fisher screen and tracks the
performance of these stocks in a hypothetical portfolio.
Figure 1 illustrates the erratic performance of the Philip
Fisher screen over the period from January 1998 through the
end of August 2008. Despite its gyrations, the stocks passing
the screen have produced price gain returns that have outpaced the S&P 500over the test period, the Fisher screen
gained 133.5% while the S&P 500 is up 32.2%. Over the 10


complete calendar Figure 1. Performance of the Philip Fisher Screen

years that make up
the testing period, the
Fisher screen saw an
S&P 500
equal number of up
years as down. YearS&P SmallCap 600
to-date, the screen
Fisher (Philip)
has gained 5.2%.
Overview of
Passing Firms

200%
150%
100%

Table 1 highlights some of the

characteristics of the
50%
companies currently
passing the Philip
Fisher screen compared to the typical
0%
exchange-listed stock,
while Table 2 lists the
stocks passing the
screen as of Septem-50%
ber 5, 2008.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
While Fisher was
not in favor of merely
Monthly
seeking undervalPrice Gain (%)
Std Dev
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 YTD Cum'l
(%)
ued stocks, he adPhilip Fisher Screen*
2.6 5.4 (16.7) 70.7 (10.7) 78.1 (3.9) (11.7) (1.2) 8.2
5.2 133.5
9.5
S&P 500
26.7 19.5 (10.1) (13.0) (23.4) 26.4 9.0
3.0 13.6 3.5 (12.6)
32.2
4.3
vocated buying outS&P MidCap 400
17.7 13.3 16.2
(1.6) (15.4) 34.0 15.2 11.3
9.0 6.7 (5.0) 144.7
5.1
standing companies
S&P SmallCap 600
(2.1) 11.5 11.0
5.7 (15.3) 37.8 21.4
6.7 14.1 (1.2) (2.0) 113.8
5.4
All Exchange-Listed Stocks
5.9 35.1 (14.2) 21.2 (13.3) 81.1 22.8
4.5 17.2 (4.5) (12.3) 194.4
6.0
when they were out
*Price performance of hypothetical portfolio rescreened and rebalanced monthly using month-end closing prices.
of favor because the
Does not include transaction costs or dividends. Screen results are not realistic as to what an investor could achieve in the real world.
Data as of August 31, 2008.
market has temporarily misjudged the true
value of the company.
He also wasnt against
buying outstanding companies at fair Table 1. Portfolio Characteristics of the Philip Fisher Screen
value, but cautioned investors to expect

Philip
Exchangelower, albeit respectable, returns.

Fisher
Listed
AAIIs Philip Fisher screen looks
Portfolio Characteristics (Median)
Portfolio
Stocks
for outstanding companiesfirms
Price-earnings ratio (X)
12.2
16.4
with strong growth opportunities that
Price-to-book-value ratio (X)
2.12
1.54
are also trading at undervalued levels.
Price-earnings-to-EPS-est.-growth (X)
0.5
1.2
At 12.2, the median price-earnings ratio
EPS 5-yr. historical growth rate (%)
38.3
13.6
for the Fisher stocks is lower than the
EPS 3-5 yr. estimated growth rate (%)
24.4
14.0
median for the typical exchange-listed
Market cap. ($ million)
729.1
367.8
stock. In contrast, the price-to-book
Relative strength vs. S&P (S&P=0) (%)
17
5
ratio is above the median for exchange
Monthly Observations
listed stocks.
Average no. of passing stocks
22
The screen also looks for stocks
Highest no. of passing stocks
82
with positive sales growth over each
Lowest no. of passing stocks
0
of the last three years and a three-year
Monthly turnover (%)
32.5
average sales growth rate that matches
or exceeds its industrys median sales
Data as of September 5, 2008.
growth rate over the same period.


AAII Journal

AAII Stock Screens

Table 2. Companies Passing the Philip Fisher Screen

Company (Exchange: Ticker)

12-Mo Net
Profit Margin
Firm Indus
(%)
(%)

3-Yr Sales
Growth
Firm Indus
(%)
(%)

Cal Dive Intl (N: DVR)

12.4 10.0 70.5
Cogo Group (M: COGO)
9.1 4.2 38.6
KHD Humboldt Wedag (N: KHD)
8.5 7.1 45.8
MEMC Electronic Materials (N: WFR) 32.4 2.8 23.2
Republic Airways Holdings (M: RJET) 6.5 3.4 26.0
Silicon Motion Technology (M: SIMO) 16.5 2.8 39.2
American Oriental Bio. (N: AOB)
25.4 36.8 71.2
First Mercury Financial (N: FMR)
28.9 9.8 26.7
Sohu.com (M: SOHU)
28.5 1.2 24.9
TechTeam Global (M: TEAM)
1.5 1.2 20.2
The9 Limited (ADR) (M: NCTY)
20.2 1.0 232.2
Amer. Movil S.A.B de C.V. (N: AMX) 31.9 1.6 30.8
CTC Media (M: CTCM)
29.6 2.7 44.8
Denbury Res (N: DNR)
27.6 0.8 36.4
hhgregg (N: HGG)
1.6 0.8 16.1
Lihir Gold Ltd (ADR) (M: LIHR)
9.0 7.6 28.5
NII Holdings, Inc. (M: NIHD)
12.3 1.6 37.1
Quicksilver Resources (N: KWK)
78.2 0.8 46.2
Super Micro Computer (M: SMCI)
4.7 3.2 36.7
Superior Energy Servs (N: SPN)
18.9 10.0 40.7
Volcom (M: VLCM)
11.4 1.0 33.4
Western Digital (N: WDC)
11.6 1.1 30.4
Shamir Optical Indus (M: SHMR)
6.8 9.8 19.1

31.5
9.7
12.7
11.9
15.8
11.9
18.2
4.5
17.1
17.1
16.2
12.5
7.5
28.5
8.8
27.0
12.5
28.5
14.1
31.5
6.7
10.0
5.3

Price-
3-5 Yr
Earnings
EPS
Est
Grth
EPS
EPS
Est
12 Mo Y0
(%)
(X)
(X)

35.0
26.3
32.8
28.9
15.0
20.0
24.0
20.0
48.5
25.0
23.1
25.4
28.4
24.4
18.5
34.5
32.3
27.5
23.3
18.0
24.4
14.4
23.0

11.0
9.7
12.3
14.1
4.0
7.4
12.1
7.6
30.6
23.5
11.4
15.4
17.2
16.1
17.2
41.5
18.7
7.3
16.1
9.9
12.2
6.7
11.7

10.7
8.2
11.1
9.8
4.5
5.5
10.6
7.6
19.2
10.7
9.1
13.5
14.6
11.9
9.1
18.6
17.6
14.9
12.3
9.4
11.9
6.6
10.6

Fwd 52-Wk
PE to
Rel
Est
Strgth
EPS
Index
Grth (S&P=0)
(X)
(%)
Description

0.3
0.3
0.3
0.3
0.3
0.3
0.4
0.4
0.4
0.4
0.4
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5

Exchange Key: A = American Stock Exchange, M = NASDAQ, N = New York Stock Exchange.
Source: AAIIs Stock Investor Pro/Reuters Research, Inc. Data as of September 5, 2008.

The stocks currently passing the

Fisher screen have shown an average
increase of 38.3% in earnings per share
over the last five years, while exchangelisted stocks have seen earnings grow at
a median rate of 13.6% over the same
timeframe. While, looking forward, earnings growth is expected to slow to 24.4%
a year for the next three to five years,
this still exceeds the expected earnings
growth rate of 14% for exchange-listed
stocks.
The median market cap for the
Fisher stocks is just over $729 million,
almost twice that of exchange-listed
stocks, which have a median market
cap of almost $368 million. The stocks
currently passing AAIIs Philip Fisher
screen have underperformed the S&P

October 2008

500 by 17% over the last 52 weeks. By

comparison, the typical exchange-listed
stock has underperformed the S&P 500
by 5% over the last year.
Currently, 23 companies pass the
Fisher screen, which is slightly above
the monthly average of 22 over the last
10 and a half years.
Table 2 ranks the passing stocks in
ascending order by their ratio of forward
price-earnings ratio (current share price
divided by the consensus earnings per
share estimate for the current fiscal
year) to the estimated earnings growth
rate (PEG ratio). Fisher believed that
the only value in looking at historical
price-earnings ratios was to help gain a
perspective on the base valuation over
time. Comparing the price-earnings to

21
57
8
18
39
62
2
17
131
17
39
3
10
29
5
31
22
28
49
20
44
33
28

marine construction
tech module design
indusl engin & equip
silicon wafers
passenger airlines
semiconductors
pharmaceuticals
insurance prods
Internet media
IT outsourcing
on-line games
wireless servs
Russian TV network
oil & natural gas
electronics retailer
gold producer
wireless servs
oil & gas
server systems
oilfield servs & equip
clothing & footwear
computer hard drives
eyeglass lenses

See the AAII Stock Screens

area of AAII.com for more
details on this approach.

the earnings growth rate is a common

valuation technique. Companies with
higher expected earnings growth should
trade with higher price-earnings ratios.
Stocks with a price-earnings ratio half
the level of the earnings growth are
considered attractive.
Republic Airways Holdings (RJET)
has the lowest forward price-earnings
ratio of 4.5, based on the consensus
earnings per share estimate for the
current fiscal year. The company also
has the second-lowest forecasted earnings growth rate for the next three to
five years at 15%. This translates into
a forward price-earnings to estimated
earnings growth value of 0.3. The
companys net profit margin is slightly
higher than the average for the airline

What It Takes: The Philip Fisher Screen

Net profit margin for the last 12 months and each of the last five fiscal years is greater than the industrys
median net profit margin for the same period

Sales have increased on a year-to-year basis over each of the last three years and over the last 12 months
The three-year average growth rate in sales is greater than or equal to the industrys median average sales
growth rate over the same period

The company is not expected to pay a dividend in the next year (indicated divided is zero)
The ratio of the forward price-earnings ratio (based on the consensus earnings per share estimate for the

current fiscal year) to the estimated growth rate in earnings (PEG ratio) is greater than 0.1 and less than or
equal to 0.5

industry, but its sales growth over the

last three years is significantly higher
than that of the industry. Given the
woes of the airline industry in the face
of record-high oil prices, it is probably
not surprising that the company has underperformed the S&P 500 by 39%over
the last 52 weeks.
Sohu.com (SOHU), a Chinese Internet media firm, has the highest forward
price-earnings ratio of 19.2 among the
Fisher stocks. However, its forward
PEG ratio is 0.4 due to the companys
high forecasted earnings growth rate of
48.5, which is also the highest among
these passing companies. Sohu.coms
net profit margin of 28.5% is well
ahead of the typical computer services
company, which is currently losing 1.2
cents for ever dollar of revenue it collects. The companys sales growth over

the last three years is only slightly better

than its industry24.9% versus 17.1%.
Over the last 52 weeks, SOHU shares
have outperformed the S&P 500 by an
impressive 131%, despite having fallen
almost 20% between the close on July
24 and the close on September 5.
Conclusion
Philip Fisher was a strong believer
that the market is not efficient. Occasional fads and styles in the market may
produce distortions in the relationship
between existing prices and real values.
With the same set of facts, the market
may reach different conclusions depending upon its physiology of the moment.
Realities not only terminate these distortions, but also often cause the emotion
to swing to the opposite extreme.

To succeed in investing, you must be

able to see through the market opinion
and discover the actual facts. Do not
blindly accept or reject the market opinion. You must be knowledgeable, exhibit
good judgment, and have enough courage to act based upon your conviction.
As the saying goes, nothing is worth
doing unless it is worth doing right.
While the rewards of investing in growth
stocks are tremendous, the penalties for
making judgments based upon superficial analysis are equally large. Fisher felt
that making some mistakes is an inherent
cost of investing for major gains. He
said that the key to long-term success
is to do your homework, recognize
mistakes as soon as possible, and learn
how to keep from repeating the same
mistakes. Luck tends to even out in the
long run.

Wayne A. Thorp, CFA, is financial analyst at AAII and editor of Computerized Investing.

AAII Journal