Here is part two of growth investor Phillip Fisher’s stock investing checklist.
Here are another three characteristics that he looks for in companies.
You can check out part one here.
4. Does the company have an above-average sales organization?
Increasing sales is the main driver for a company to grow profits and cash flows.
Here, Fisher looks for an effective sales organization as a criteria to assess if a company can do better than its competitors.
There are a few ways to calculate this – some companies release sales numbers by employee or retail store, and investors can use such numbers to compare across all companies within the same industry.
These operating metrics are used to measure the level of sales generated per employee or store.
If these metrics are lower than competitors, it may be symptomatic of problems with competitiveness and corporate structure.
Such signs will cause a potential investor to be more wary of investing in the company.
Another method of assessing a company’s sales effectiveness is to check out Glassdoor, where salaries of different grades of staff are posted online (company names remain hidden).
If the sales staff are incentivized well compared to other companies, this also may be a sign that the company has a progressive and superior remuneration structure in place that attracts better talent.
5. Does the company have a worthwhile profit margin?
Profit margins are a great way to assess if companies have a good cost structure, and Fisher is talking about a company’s net profit margin here.
As a recap, net margin is computed as the net profit divided by revenue and tells us the level of net profit generated per dollar of sales.
If the net margins are consistently very thin (e.g. 1% to 2%), then the company is at risk of falling into losses should expenses spike up unexpectedly.
On the other hand, companies with very strong profit margins (e.g. 20% and above) should also be assessed to see if such high margins are sustainable.
A high net margin may attract competition that may erode these superior margins over time.
That said, if a company can maintain high net margins for a prolonged period, it demonstrates that it has a superior competitive moat in place that allows it to protect its profits.
6. What is the company doing to maintain or improve profit margins?
The investor should also study how the company is trying to improve its profit margins.
Some methods may include – a restructuring exercise that will eliminate a huge chunk of costs or the re-configuration of their factories to make them more efficient and use fewer resources.
The company may also acquire a new division with higher profit margins and close off or divest older, weaker divisions.
Conversely, companies that do not make any efforts to improve profit margins should be shunned as it implies that management does not take cost control seriously.
Of course, the investor must also ensure that such initiatives enable higher profit margins to persist, and do not simply result in a one-off boost in profit margins that will fizzle out in future years.
Join us for part three where we look at the next 3 points within his 15-point checklist.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
