2019. 10. 24.

Ken Fisher's Price-Sales Ratio Strategy

Ken Fisher's Price-Sales Ratio Strategy

moneyshow.com (https://www.moneyshow.com/articles/tptp072513-
46306/www.moneyshow.com)

06/15/2017 2:54 am EST

Focus: STRATEGIES

John Reese

Founder and CEO, Validea.com And Validea Capital Management

As the second earnings season of the year winds down, we're reminded of how much
investors and the media focus on a company's profits and a stock's price-earnings
ratio, the ubiquitous share valuation measure, says John Reese, editor of Validea
(https://www.validea.com/) — a service that assesses the strategies of legendary
investors.

Price-earnings ratio, calculated by dividing a stock's per-share price by the

amount of per-share earnings it generates, is used to give investors an idea of
how much bang they're getting for their buck.

For decades, the P/E ratio has been the most frequently used and discussed
stock analysis ratio and, in many newspapers, it's the only valuation metric
included in their daily stock listings.

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2019. 10. 24. Ken Fisher's Price-Sales Ratio Strategy

While P/E is indeed a key tool to use when evaluating whether a stock presents a
good opportunity, investing guru and author Kenneth Fisher will tell you it
definitely isn't the only measure worth considering.

In 1984, Fisher's book Super Stocks poked holes in the usefulness of the P/E
ratio. His rationale: Even earnings of good companies can fluctuate significantly
from year to year due to activities such as equipment replacement or facilities
acquisitions, research and development costs, or even changes in accounting
methods.

Fisher argued that a company's sales, on the other hand, were far more stable
and a better way to gauge the strength of the underlying business.

He cut a new path for valuing stocks by using the price-sales ratio (PSR), which
compares the total price of a company's stock to the total sales it generates.

Since he was a student of investor psychology, 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.

By looking at sales, according to Fisher, an investor could find opportunities in

the form of companies that are operating at a loss and have low PSR's but still
have good prospects for growth (such companies wouldn't have P/E ratios as
earnings would be less than zero).

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2019. 10. 24. Ken Fisher's Price-Sales Ratio Strategy

In Super Stocks, 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.

In his book, Fisher explained his thought process as follows: "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."

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). Note: While
PSR is at the center of the Fisher strategy, he also analyzed debt-equity ratios,
free cash-per-share, profit margins, and EPS growth rates:

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

Here's five stocks in our Fisher-inspired model portfolio with a high 90%
ranking based on the Fisher strategy: Foot Locker (FL
(https://www.moneyshow.com/quotes/?symbol=FL)), ManpowerGroup
(MAN (https://www.moneyshow.com/quotes/?symbol=MAN)), Magna
International (MGA (https://www.moneyshow.com/quotes/?symbol=MGA)),
Omega Protein (OME (https://www.moneyshow.com/quotes/?symbol=OME))
and Cooper Tire & Rubber (CTB (https://www.moneyshow.com/quotes/?
symbol=CTB)).

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