The bull market is still plugging along, albeit with gray whiskers. The post-election surge still has some spring in its step, and the major indexes are hitting highs. But if you were to ask billionaire investor Ken Fisher for his take on things, he might cite businessman John Templeton's market maxim that bulls are "born on pessimism, grow on skepticism, mature on optimism and die on euphoria." In a September article on MarketWatch Fisher said, "I think this is going to be the longest bull market in history and, arguably, the most joyless."
Fisher, who leads money management firm Fisher Investments ($70 billion in managed assets) isn't necessarily a crepehanger--he just seems to think that the current market will grind on, failing a precipitous "wallop" that would send the global economy into a recession. So, assuming there's more room for the market to run, how would Ken Fisher advise investors? As he told MarketWatch, "You don't want to snatch defeat from the jaws of victory by doing something that's a little too tricky." He believes that investors who search or the "next big thing" run the risk of missing out on bull-market gains.
In 2003, I launched a Fisher inspired model based on the strategy outlined in his book, "Super Stocks". While Fisher has stated that he doesn't follow this exact strategy, I found Fisher's investment track record and also the merits of the strategy worthy enough to be included in one of my stock-screening models on Validea. The Fisher approach, as I have captured it, is rooted in the belief that focusing too heavily on a stock's price-earnings ratio is misguided since earnings can fluctuate significantly from year to year. Management decisions to replace plant and equipment or changes in accounting methods, for example, can throw off earnings. On the other hand, he found that sales of what he called "super companies" -those capable of growing their stock price by between 3 and 10 times in value over a period of 3 to 5 years-rarely decline significantly. Therefore, one of the metrics Fisher used to gauge the strength of a company was the price to sales ratio (PSR) which he measured per the following guidelines:
· Avoid stocks with PSRs greater than 1.5, and never buy those with a ratio of over 3 (which would mean you are paying three dollars for every one dollar of sales). While stocks with high PSRs could increase in price, Fisher believed that such a shift would be based more on "hype" than on anything of substance.
· Aggressively look for stocks with PSRs of 0.75 or less (which would mean that you're paying seventy-five cents or less for every dollar of sales).
In 2016, Validea's Fisher-based Price/Sales Investor portfolio has been one of the top performers both in terms of returns as well as gains versus the S&P 500. A a rough couple of years for concentrated value models, the 10-stock model portfolio based on the Price/Sales method is up 32.9% compared to 7.2% for the overall market. The portfolio holds the top ten value stocks at any given time and, in addition to the PSR, our screening model uses other fundamental metrics outlined by Fisher including:
- Debt-equity ratio
- Earnings-per-share growth
- Free cash flow-per-share
- Three-year average net profit margin
I've outline a few names below that score highly at the current time based on the Fisher model. All of these stocks are currently holdings in the Price/Sale portfolio and are worthy of consideration as you look to find under the radar stocks with good fundamentals.
Marcus & Millichap Inc. (NYSE:MMI) is a brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. The stock's PSR of 1.43 falls within the required range under our Fisher-based model, and the stock is made more attractive by the company's low leverage (debt is only 4% of equity). Long-term earnings-per-share growth of 38.36% well exceeds the required minimum of 15%, and free cash-per-share of $1.67 adds appeal. Three-year average profit margin of 6.72% more than satisfies the minimum 5% required under this model. MMI also scores well under our Peter Lynch-inspired screen, which finds the ratio of price-earnings to EPS growth (Lynch's well-known P/E/G ratio) to be attractive at 0.40, and our Joel Greenblatt-based strategy gives high marks to the stock's earnings yield of 12.76% and return-on-total capital of 38.12%.
Greenbrier Companies Inc. (NYSE:GBX) is a designer, manufacturer and marketer of railroad freight car equipment, marine barges, wheel services, parts and other services to the railroad and transportation industries. The company earns a perfect score under our Fisher-inspired stock screen given its price-sales ratio of 0.4, well below the preferred level of 0.75. Debt-to-equity of 34.77% meets this model's requirements, as does the long-term growth in earnings-per-share of 57.80%, well over the minimum requirement of 15%. Three-year average net profit margin of 6.44% and free cash-per-share of $5.22 add interest.
Barrett Business Services Inc. (NASDAQ:BBSI) is a provider of business management solutions for small and mid-sized companies. The price-sales ratio of 0.52 passes our Fisher-based model with flying colors as does the company's modest debt level (debt is only 7.48% of equity). BBSI's long-term EPS growth rate of 27.64% well exceeds the model's minimum requirement of 15%, and liquidity is strong with free cash flow-per-share of $12.42. Our Lynch-inspired investment strategy likes BBSI's P/E/G ratio of 0.67 and considers the company a "fast grower".
Haverty Furniture Companies Inc. (NYSE:HVT) is a specialty retailer of residential furniture and accessories. The company's price-sales ratio of 0.57 (based on trailing 12-month sales) is well below this model's preferred maximum level of 0.75, and long-term EPS growth of 20.23% shows well versus the required minimum level of 15%. Low leverage (debt-equity of 19.18%) strengthens the risk profile. The P/E/G ratio of 0.87 scores well under our Lynch-based stock screen.
Disclosure: I am/we are long MMI, GBX, BBSI AND HVT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.