We recently compiled a list of Ken Fisher’s Top 10 Growth Stock Picks with 30+% Revenue Growth. In this article, we are going to take a look at where ConocoPhillips (NYSE:COP) stands against the other growth stocks.
Growth is the holy grail of investing. After all, equities attract investors because they are return driven securities, and securities that deliver growth often produce the strongest returns. Growth, in stock valuation, comes in several flavors. The most commonly analyzed metric is share price growth, which evaluates the percentage change in the share price over a time period.
Other growth valuations come through earnings growth or revenue growth. Among these, earnings is the more commonly evaluated metric as it determines the profitability of a company. These profits are key for growth stocks since the post net income ‘money’ on a firm’s income statement is either paid out in the form of dividends or reinvested in growth if it isn’t accounted for as retained earnings. The market generally prices stocks that are expected to aggressively grow in the future high compared to their earnings in the form of the P/E ratio.
The other ratio for evaluating growth stocks is the price to sales or P/S ratio. And this is where Ken Fisher enters the conversation. Fisher is one of the richest people in the world, with estimates from Forbes Magazine showing that his net worth stood at $11.2 billion as of July 2024. At the heart of Fisher’s riches is his investment fund Fisher Investments. The total value of the fund’s 13F holdings as reflected by its SEC filings for the first quarter of 2024 is $214 billion according to Insider Monkey’s research. This makes Fisher Investments one of the biggest financial firms in the world, and its investment approach as evidenced by some of the biggest stakes in the filings is characterized by investing in high growth technology companies.
Fisher started his firm in 1979 and focused on gaining an early foothold on market participants by sifting out information that was not widely available to investors. On the quantitative front, the P/S ratio was also quite critical to his approach and we’ll get to that in a bit. Over the next two decades, his firm would focus on investing in pure play US equities, global equities, and exUS or foreign equities. The firm would focus its investment products towards high net worth individuals in the 1990s, and from 2000 onwards, it would expand its presence in the UK, Canada, and Germany. Fisher Investments now has 15 offices in 16 countries and more than a hundred thousand clients worldwide as of July 2024.
Shifting gears to focus on the firm’s performance, data from the London Stock Exchange Group (LSEG) shows that data for 76 funds managed by Fisher Investments is available. Within these, the fund that invests for retirement plans has gained 19.18% year to date and 18.77% over the past year. Compared to the benchmark S&P index, the year to date performance is two percentage points higher while the 12 month performance lags the index by three percentage points. Another fund that targets US equities irrespective of capitalization is up by 24% over the past twelve months to lead the benchmark by three percentage points. In daily trailing total returns, this fund has delivered 14.39% over the past six months to lead benchmark US large cap equity returns of 11.36% by three percentage points.
Safe to say, Fisher’s strategies and secret sauce seem to be working. This then leads us to ask, what might they be? Well, in the 70s when Fisher was starting Fisher Investments, he started to focus on evaluating a firm’s market valuation relative to its revenue through the P/S ratio. This culminated in his seminal article in the American Association of Individual Investors. (AAII) in 1984. This paper highlighted Fisher’s conviction of a solid approach to sift out growth stocks, and his research showed that stocks with low price to sales ratios tended to do rather well as they were unpopular and any good news “translates directly into higher stock prices.” He compared the stocks with the lowest 25% price to sales and price to earnings ratio to demonstrate that the seven and nine stocks with the lowest price to sales ratios delivered 64.57% and 56.11% in respective returns while the nine lowest P/E stocks delivered 28.67% in returns. During the same time, the Dow posted a gain of 20.3%.
Since multiples that use growth rates are typically used to value growth stocks, particularly those that are unprofitable, they are quite sensitive to macroeconomic conditions and particularly inflation and high interest rates. Another popular revenue based growth stock valuation metric is the Enterprise Value/Revenue ratio and it is popular for valuing software as a service (SaaS) stocks. After the coronavirus pandemic hit, the Fed rapidly cut interest rates to stimulate the economy and this translated well for EV/Revenue. Before the rate cuts, the median EV/Revenue for publicly traded SaaS stocks was 11 and after the cuts, it soared and nearly doubled to sit at 20 in 2021.
Similarly, the interest rate hikes of 2022 and high inflation that led to tight business budgets didn’t fare well for EV/Revenue. Since high interest rates also make it difficult for firms to finance their business operations, and high inflation leads to rising costs, SaaS firms face twice the impact in the form of lower revenue. This is also translated into their EV/Revenue multiples, as for the last 18 months, the median multiple was 7 which is at a multi year low. The lower multiples are accompanied by dropping growth rates, as while the pre pandemic median revenue growth rate of SaaS companies was 30% and accelerated to 33% during the pandemic, it has since dropped and is hovering around 17%.
So, as growth slows down and multiples struggle, it might be wise to see what the guru of growth Ken Fisher is doing. We’ve done so today so read more below.
Our Methodology
To make our list of Ken Fisher’s top revenue growth stocks, we scanned Fisher Investments’ Q1 2024 SEC filings and ranked the top 160 holdings by their three year annualized revenue growth. Out of these, the top ten Ken Fisher stocks with the highest revenue growth were chosen.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An underground network of pipelines transporting oil through an expansive terrain.
ConocoPhillips (NYSE:COP)
Number of Hedge Fund Investors in Q1 2024: 62
3 Yr Revenue Growth: 44.04%
Fisher Investments’ Q1 2024 Stake: $958 million
ConocoPhillips (NYSE:COP) is an American oil and gas exploration and production firm headquartered in Houston, Texas. When compared to big ticket oil names like Chevron or Exxon, ConocoPhillips (NYSE:COP)’s valuation depends a lot more on its inventory and the lifetime of its drilling projects. This is because a large portion of its oil production is from US shale, and it also means that any changes to the lifetime estimates of its projects can affect the share price negatively or positively. ConocoPhillips (NYSE:COP) is also making big moves as it plans to acquire Marathon Petroleum (another shale producer) for a whopping $22.5 billion price tag. While the deal is yet to receive FTC clearance if approved, it would make ConocoPhillips (NYSE:COP) America’s largest independent oil and gas producer. However, it might not provide the firm with a lot of production boost, since Marathon’s production focuses on the mature regions of Eagle Ford and Bakken in the US. However, the deal will help beef up ConocoPhillips (NYSE:COP)’s income statement, and add 3% to its EPS in 2025 and 2026 along with contributing $500 million in synergies.
ConocoPhillips (NYSE:COP)’s management commented on the crucial question of the firm’s cost control with respect to drilling laterals, sharing during the Q1 2024 earnings call that it is aiming to increase lateral length for better cost management:
“Let’s start on some of the longer laterals. I talked a little about previously on the operating efficiency on the frac spreads and drilling. Again, our teams are very focused on long lateral development, as we go forward. As a reminder for the group on the phone, if you look at our Permian inventory, 80% of the laterals are 1.5 miles or greater and we got 60% 2 miles or greater. If you look specifically at 2024, again 80% of the wells or 1.5 miles or greater and about 20% are 3-mile laterals. And we’ve got – as I mentioned before, we got some of those longer laterals coming online in the second half of this year. We see up to that 30% to 40% improvement on cost of supply when you move from a 1-mile lateral to a 3-mile lateral.
So we’re seeing those efficiency improvements out there. Maybe just staying on the drilling side, specifically in the Midland Basin, we’ve had some recent success there, where we’ve had internal record wells. We look from spud to rig release so very favorable performance over the last three months and we continue to see that on the drilling side. And the bottom line is, it does translate as we focus in on more feet per day, more stages per day more pumping hours per day. And we’ve seen that 10% to 15% improvement of pumping hours from 2022 to 2033. That all translates to improved capital efficiency and therefore lowering your cost supply. So it’s very encouraging across all fronts.”
Overall COP ranks 7th on our list of Ken Fisher’s top 10 growth stocks picks. You can visit Ken Fisher’s Top 10 Growth Stock Picks with 30+% Revenue Growth to see the other growth stocks that are on hedge funds’ radar. While we acknowledge the potential of COP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than COP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.