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Book Summary of Super Stocks
by Kenneth L. Fisher

What is the book Super Stocks about?

Super Stocks by Kenneth L. Fisher is a guide to identifying and investing in stocks that have the potential to deliver exceptional returns. The book introduces the concept of "Super Stocks"—stocks of companies that are temporarily undervalued due to a "glitch" or setback but have strong fundamentals and growth potential. Fisher emphasizes the use of the Price Sales Ratio (PSR) as a more reliable metric than traditional earnings-based methods for valuing these companies. The book is designed to help investors recognize undervalued opportunities, make informed investment decisions, and know when to sell for maximum profit.

Who should read the book Super Stocks?

This book is ideal for:

• Individual investors looking to improve their stock-picking skills.
• Professional investors seeking to refine their valuation techniques and identify undervalued stocks.
• Value investors who are interested in alternative valuation methods beyond traditional Price-Earnings Ratios.
• Anyone interested in learning about stock market dynamics and how to capitalize on market inefficiencies.

10 Big Ideas from the Book Super Stocks

1. Price Sales Ratio (PSR): Fisher argues that the PSR is a more stable and reliable metric for valuing companies than the Price-Earnings Ratio (P/E). A PSR of 0.75 or less is considered ideal for buying.

2. The Glitch: Temporary setbacks or "glitches" in a company's growth cycle can create buying opportunities when the stock is undervalued by the market.

3. Super Companies: Look for companies with strong growth orientation, effective management, and unique competitive advantages. These are more likely to recover from glitches and deliver long-term returns.

4. Margin Analysis: High and stable profit margins are key indicators of a company's competitive strength. Fisher emphasizes the importance of both gross and net profit margins in assessing a company's viability.

5. Market Timing with PSR: PSRs can be used as a tool for market timing, helping investors determine when a stock or the broader market is overvalued or undervalued.

6. Avoid High Competition: Fisher advises focusing on companies with less competition or those that dominate niche markets, as these companies often achieve higher margins and are more resilient.

7. Qualitative Assessments: Beyond numbers, it's important to evaluate management quality, market position, and customer value propositions to identify potential Super Stocks.

8. Systematic Approach: A disciplined, methodical approach to identifying, evaluating, and investing in Super Stocks is crucial for long-term success.

9. When to Sell: Fisher provides guidance on when to sell a stock, such as when the PSR rises significantly above 1.5 or when signs of slowing growth appear.

10. Case Studies: Real-world examples, like Verbatim Corporation and California Microwave, illustrate how these principles can be applied to achieve significant investment returns.

Summary of Super Stocks by Kenneth L. Fisher

Kenneth L. Fisher’s Super Stocks is a comprehensive guide to identifying, valuing, and investing in stocks with the potential to deliver extraordinary returns. The book is divided into four parts, each of which builds on the last to provide a full framework for successful stock market investing. Fisher introduces key concepts, such as the Price Sales Ratio (PSR), and emphasizes the importance of understanding both the quantitative and qualitative aspects of a company.

Part 1: The Anatomy of a Super Stock

In the first part of the book, Fisher introduces the concept of the "glitch," a temporary setback or problem that young, rapidly growing companies often experience. These glitches present opportunities for investors to buy high-quality companies at depressed prices.

• Glitch Phenomenon: Glitches often cause a stock to drop significantly, sometimes as much as 80%, creating a buying opportunity for savvy investors. Fisher emphasizes that these glitches are part of the natural growth cycle of a company.
• Product Life Cycle: Understanding the product life cycle—introduction, growth, maturity, and decline—is crucial for predicting when a company might experience a glitch and when it might recover.
• Stock Price Fluctuations: Stock prices tend to fluctuate more dramatically than sales or profits during a glitch. Investors who buy during these periods of pessimism can see substantial returns as the company recovers.

Key Ratio:

• Price Sales Ratio (PSR): Ideal buying target is 0.75 or less.

Part 2: Valuation Analysis

Part 2 delves into the core methods of valuing stocks, with a focus on the PSR. Fisher critiques traditional methods like Price-Earnings Ratios (P/E ratios) and introduces PSR as a more reliable and stable metric for evaluating companies, especially during periods when earnings are volatile or non-existent.

• Critique of Traditional Valuation Methods: Fisher argues that earnings-based valuation methods are often flawed because earnings can be manipulated and are less stable than sales.
• Price Sales Ratio (PSR): The PSR is calculated by dividing a company’s market capitalization by its sales over the last 12 months. A PSR of 0.75 or less is considered ideal for purchasing a stock, indicating that the market is undervaluing the company.
• Profit Margins: When using PSR, it’s important to consider profit margins to understand the relationship between PSR and the implied Price-Earnings Ratio (P/E). For example, a company with a 7.5% profit margin and a PSR of 1.0 has an implied P/E ratio of 13.33.

Key Ratios:

• Price Sales Ratio (PSR): 0.75 or less for buying.
• Profit Margin: A key factor in assessing the attractiveness of a PSR.

Part 3: Fundamental Analysis

In Part 3, Fisher emphasizes the importance of understanding the fundamental aspects of a company. This includes analyzing management quality, market position, and financial health. He also introduces margin analysis as a tool for identifying companies with a sustainable competitive advantage.

• Identifying Super Companies: Look for companies with strong growth orientation, excellent marketing, and competent management. These companies are more likely to overcome glitches and continue growing.
• Avoiding Competition: Fisher advises avoiding highly competitive markets and instead focusing on companies with unique competitive advantages or those that dominate niche markets.
• Margin Analysis: Gross and net profit margins are key indicators of a company’s competitive advantage. Higher margins typically suggest that a company has pricing power and efficient operations.

Key Ratios:

• Gross Profit Margin: Higher is better.
• Net Profit Margin: Higher is better.
• Debt-to-Equity Ratio: Lower ratios indicate financial stability.

Part 4: Dynamics

The final part of the book focuses on the practical application of the concepts and methods discussed earlier. Fisher provides a systematic approach to identifying and investing in Super Stocks, as well as guidance on when to sell.

• Systematic Approach: Fisher advocates for a disciplined approach to investing, emphasizing the importance of scanning for low PSRs, conducting qualitative assessments, and doing thorough research.
• Timing the Sale: Knowing when to sell is crucial. Fisher suggests that a rising PSR, particularly when it exceeds 1.5, may indicate that a stock is overvalued and it’s time to consider selling.
• Case Studies: Fisher presents real-world examples, such as Verbatim Corporation and California Microwave, to illustrate how these principles work in practice.

Key Ratios:

• Price Sales Ratio (PSR): 0.75 or less for buying, and consider selling when PSR rises above 1.5.
• Profit Margins: Continually assess to ensure the company maintains its competitive advantage.

Overall Summary and Key Takeaways

Kenneth L. Fisher’s Super Stocks provides a thorough framework for identifying and investing in stocks that have the potential to deliver exceptional returns. The key to Fisher’s approach is the use of the Price Sales Ratio (PSR), which he argues is a more stable and reliable metric than traditional earnings-based ratios.

• PSR is the cornerstone of Fisher’s valuation strategy, with an ideal target of 0.75 or less for buying and a threshold of 1.5 as a potential selling point.
• Profit Margins are crucial for understanding the implications of PSR and ensuring that a company’s competitive advantage is sustainable.
• Fundamental Analysis involves assessing a company’s growth orientation, management quality, and market positioning to identify potential Super Companies.
• Glitches represent opportunities to buy undervalued stocks, and a disciplined, systematic approach is necessary to capitalize on these opportunities.

By combining these elements—valuation analysis, fundamental analysis, and a disciplined investment approach—Fisher provides investors with the tools needed to identify Super Stocks and achieve superior long-term returns.

In Super Stocks, Kenneth L. Fisher references several influential books and authors that have shaped his investment philosophy. Some of the key references include:

1. "Security Analysis" by Benjamin Graham and David Dodd:

   • Often considered the bible of value investing, this book introduced the concept of intrinsic value and laid the foundation for modern financial analysis.

2. "The Intelligent Investor" by Benjamin Graham:

   • Another classic by Benjamin Graham, this book emphasizes the principles of value investing and is widely regarded as essential reading for investors.

3. "Common Stocks and Uncommon Profits" by Philip Fisher:

   • Written by Kenneth Fisher's father, this book introduces the idea of "scuttlebutt" research and the importance of understanding the qualitative aspects of a company.

4. "The Money Masters" by John Train:

   • This book profiles some of the most successful investors and their strategies, providing insights into various approaches to investing.

These references highlight the foundational principles that Fisher builds upon in Super Stocks, combining traditional value investing with his unique approach to stock valuation using the Price Sales Ratio (PSR).

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