Philip Fisher - Fifteen Points to Look For in A Common Stock

Point 1 - Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Ignore one time gain, it needs to be sustainable increase in sales. Also, it needs to consider the industry cycle. If the industry is at its infant stage, there is a lot of growth. Once it reaches the plateau, there will be minimum growth, follow by decline. When Iphone first introduced to the market, Nokia phone went into decline stage. However, after years of extraordinary growth, other competitors start to enter the market, for example, Xiaomi and Samsung want to have a piece of the market share.

You need to believe in the company's future sales curve. If a company's management is outstanding and the industry is one subject to technological change and development research, the shrewd investor should stay alert to the possibility that management might handle company affairs so as to produce in future the type of sales curve, this is the first step towards choosing an outstanding investment.

Point 2 - Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

The management will improve old products and develop new ones. The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities. Point 2 focuses on management attitude. Does the company recognise in time it will almost certainly have grown up to the potential of its present market and that to continue to grow it may have to develop new markets in new future?

Point 3 - How effective are the company's research and development efforts in relation to its size?

On the surface, it requires comparison of the research expense with respect to sales and whether this creates a competitive advantage over other competitors. The management needs to coordinate diverse technical skills into a closely knit team and stimulate each expert on that team to his greatest productivity the only kind of complex coordination upon which optimum research results depend. In addition, the coordination with top management is critical to maximise efficiency of commercial research.

Point 4 - Does the company have an above-average sales organization? 

Without sales, the company's survival is impossible. Many things are important to corporate success, sales, production and research are important elements. For steady long-term growth, a strong sales arm is vital.

Point 5 - Does the company have a worthwhile profit margin?

High-profit margin is often eroded when new competition enters the market, increase in cost and other various reason. If you observe that the company is able to maintain high-profit margin over the years, it is a good sign that the company possesses a strong competitive advantage. Stay away from low-profit margin or marginal companies.

Point 6 - What is the company doing to maintain or improve profit margin?

Certain companies manage to improve profit margins by capital improvement or product engineering improvement. They aim to reduce costs to offset the rising trend of wages. The investors should give attention to the amount of ingenuity of the work being done on new ideas for cutting costs and improving profit margins.

Point 7 - Does the company have outstanding labor and personnel relations?

An investor should be sensitive to the attitude of top management toward the rank and file employees. Workers are readily hired or dismissed in large masses, dependent on slight changes in the company's sales outlook or profit picture.  Nothing is done to make ordinary employees feel they are wanted, need and part of the business picture. Management with this type of attitude does not usually provide the background for the most desirable type of investment. 

Point 8 - Does the company have outstanding executive relations?

The company offering greatest investment opportunities will be one in which there is a good executive climate.

Point 9 - Does the company have depth to its management?

Once a company reaches a size where it will not be able to take advantage of further opportunities unless it starts developing executive talent in depth. Does top management welcome and evaluate suggestions from personnel even if, at times, those suggestions carry with them adverse criticism of current management practices?

Point 10 - How good are the company's cost analysis and accounting control?

Only when the company is able to capture a clear picture of financial status, with precise knowledge of true cost in relation to other factors, then they can establish correct pricing policies, focus special attention for planning.

Top management needs to understand the importance of accounting controls and cost analysis.

Point 11 - Are there other aspects of the business, somewhat particular to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

Look at the lease of the land, building, insurance cost relative to others, patents and other competitive advantages.

Point 12 - Does the company have a short range or long range outlook in regard to profits?

Relate this to a salesman, whether he is here to build a relationship with you to serve you on a long term basis or he is just here for the quick bucks. The difference in treating the customers is noticeable.

Point 13 - In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

If borrowing power is not sufficient, however, equity financing becomes necessary. The attractiveness of the investment depends on careful calculations as to how much the dilution resulting from the greater number of shares to be outstanding will cut into benefits of existing shareholders.

Point 14 - Does the management talk freely to investors about its affairs whe things are going well but "clam up" when troubles and disappointments occur?

How a management reacts to circumstances can be a valuable clue to the investor. The management that does not report as freely when things are going badly as when they are going well usually "clams up" in this way. There is no sense of responsibility to stockholders.

Point 15 - Does the company have a management of unquestionable integrity?

This is by far the most important question. Integrity speaks more than any other issues presented.