I’ve seen many Philips Fisher screens, an extremely powerful and quality stock screener, around on prominent Indian websites, and believe me, they’re pure bullshit.
That’s because the Philips Fisher screen checks for qualitative data but the online screeners mine quantitative data. Sure, there are a few quantitative checks in this screener, but most of it is qualitative.
Here are the following 15 checks of the Philips Fisher Screen:
1. Do the company’s products or services have enough potential to increase sales for many years?
To figure this out, you need to dive deep into the product profile, check the capacities, end-use, and demand potential. You can get all information on Google if you key in words such as
{product name} + demand +market +pdf (etc., you can use your creativity t vary the words)
2. Is the management of high quality in terms of knowledge and technical skills?
Family-run businesses and shell companies typically stuff the board of directors with unqualified relatives and cronies.
You need to check qualifications of directors and their past track record of managing successful companies.
3. How effective are the company’s R&D efforts?
Does the company spend on R&D, and if it does what innovative products has it launched in the past.
Yo can get the information by checking the P&L Statement for the R&D expense and then reading up the management discussion in the AR.
For example, I was impressed by HBL Power’s product line shift to renewables and cloud sectors, and also R&D into developing an EV engine.
4. Does the company have an above-average sales-marketing organization?
Sales and marketing are the lifeblood of a company. If they are effective, the company will not stock up on huge inventories neither will it collect its dues on time.
Check the sales and marketing expenses and correlate them with inventories held, year over year increase in sales, and credit period extended to debtors to is reasonable enough to justify the marketing spend.
5. Does the company have a worthwhile profit margin?
The company should be making gross profit, EBITDA, and net profit margins that are higher than or at least equal to the sector averages.
6. What is the company doing to maintain or improve profit margins?
You will find this information in the AR and in the company’s announcements. If the company is doing things right, its sales will increase year over year or quarter over quarter.
In case of disruptive years like 2020, the company should at least be performing on par with the sector averages.
7. Does the company have outstanding labor and personnel relations?
If workers are unhappy with the company, productivity will increase and workers will go on strikes frequently.
Comparing the company’s gross profit ratio with its peers will help you understand if its productivity is on par with industry standards. For example, if the company employs 1,000 workers and generates a lower gross profit ratio than its competitor that employs 1,500 people can indicate that the production manager is not up to it. However, if this ratio is increasing year over year, it implies the company is doing good.
Labor relations typically are commented on by the management in the AR. You should read up to check what’s going on.
8. Does the company have outstanding executive relations?
If the promoter has appointed his/her unqualified spouse to head the sales or production, then it is a red alert.
You can get a list of the company’s top executives in the related party and salary disclosures in the AR. These sections are often overlooked by analysts, but hold very important clues about the company’s quality.
9. Does the company have depth to its management?
The answers are provided in #2, #3, #4, #7, and #8 above.
10. How good are the company’s cost analysis and accounting controls?
Here is where ratio analysis comes in handy. If the company is efficient in controlling costs, its profitability ratios will be higher than the industry averages.
11. What are the other industry-specific aspects of the business to check?
This is a tough cookie. You need to understand how the industry ticks to know what’s specific to it.
Interviewing the production manager or the sales delivery manager of the company or its peer will help you pick up clues. There’s no other way.
12. Does the company have a short-range or long-range outlook in regard to profits?
You need to dive deeper into the product profile, management quality, industry-related developments, and demand and supply scenario before judging this parameter.
It’s easy to say, but requires painstaking research.
13. Will the company dilute equity in its pursuit of growth?
Equity dilution typically go against shareholder interest because it takes time for companies to increase profits after issuing new shares. Companies with adequate reserves and cash that have the ability to internally finance expansions should be preferred over the rest.
That said, Indian markets are crazy and stocks can zoom or crash on equity dilution news. Examples: RIL and Reliance Chemotex.
14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles or disappointments occur?
How many of you read quarterly earnings concalls? Typically, quality companies are open about their losses and prospects. Smaller companies mislead shareholders at earnings calls.
It is not easy to separate the wheat from the chaff on this one, and no screener in the world can help you ferret this data. Just read through the earnings call and rely on your gut.
15. Does the company have a management of unquestionable integrity?
To figure this out, Google each director’s name along with the following words:
{Director’s name} + scam or SEBI or default or fraud or missing (+use other synonyms too)
That’s it. Apply these exhaustive checks to fish out quality stocks. But remember this – the Philips Fisher screen is a tough cookie. You need to have financial knowledge and understand the company’s product and the industry profile to fish out quality stocks. If you have this knowledge, you can become a pro stock picker.
Great parameters! Not sure how many stocks will qualify?!