Warren Buffett is often viewed as the ultimate investing crossbreed – the man who managed to combine the best elements of growth and value investing into a compounding machine. 

On the value side, Benjamin Graham is rightly seen as Buffett’s mentor in chief. Meanwhile, Charlie Munger usually gets most of credit for encouraging his climb up the quality growth ladder.

The impact of a third figure, Phil Fisher, shouldn’t be forgotten either. In fact, Buffett’s approach is often referred to as being “15% Fisher, 85% Graham", and you’ll often see people calling for those percentages to be flipped. 

The Godfather of GARP 

Fisher founded his investment firm Fisher & Co in 1931 and was an early advocate for two widespread approaches to investing: growth at a reasonable price (often called GARP) and, perhaps most famously, buy and hold. 

To find investments, Fisher employed deep research of a firm’s management, products, competitors and ability to keep finding new ways to grow. He often approached this work in the way a detective would approach solving a mystery – speaking to sources and looking for clues in the real world, as well as in a company’s financials.

Fisher called this “scuttlebutt” and his efforts paid off handsomely for clients of Fisher & Co, which he managed into his early nineties.

Luckily for us, Phil Fisher laid out his investing approach in the 1958 classic Common Stocks and Uncommon Profits. For many, the highlight is Fisher’s 15-point checklist for finding companies with the potential to grow their profits (and share price) for a long time.

Today we’re going to see how one of the ASX’s biggest growth darlings stacks up against those criteria. The company I’ll be putting through its paces is ResMed (ASX: RMD), which is mainly in the business of selling sleep apnea treatment devices.

How does ResMed stack up to Fisher’s 15 points? 

Does ResMed have the hallmarks of a Fisher buy and hold investment? Let’s start with point 1 on the checklist.  

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

This is basically asking if ResMed still has untapped demand. According to our ResMed analyst Shane Ponraj, the answer to this question is a clear yes. Ponraj estimates that only around 20% of people suffering from sleep apnea in developed countries currently get treatment. In emerging economies, this percentage drops towards zero.

Given that over 900 million people globally are estimated to suffer from sleep apnea, this leaves a large addressable market for ResMed to grow into.  

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

I would also say yes to this question. ResMed’s move into smarter cloud-connected devices, data and home healthcare software shows that it is striving to stay ahead of its competitors in its core business while also trying to establish new revenue streams.

ResMed has also invested in companies trying to develop novel and potentially disruptive treatments for sleep apnea like Nyxoah. 

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

As I showed in my article on ResMed's capital allocation, the firm has consistently dedicated around 7% of its revenues each year to investments in research & development.

This investment appears to have paid off. ResMed has consistently grown sales at a double-digit annual clip and its newer generation devices have maintained and even grown market share versus main competitor Phillips.

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

This is a harder question to answer from the outside and Fisher would probably get his detective hat on. What we can see from the outside, though, is that ResMed has achieved impressive sales growth and has been able to defend and grow its market share. This would suggest it has an effective sales team. 

5. Does the company have a worthwhile profit margin?

While it differs by industry, a net profit margin of 10% is generally seen as being rather good for most businesses. In this data from January 2024, NYU Stern’s valuation professor Aswath Damodaran found that the average US public company had a net margin of around 8.5%, or roughly 7.5% when financials are excluded.

ResMed has achieved an average net profit margin of 19.8% over the past five years. That seems an attractive percentage of revenue to keep as profits after all costs are considered.

6. What is the company doing to maintain or improve profit margins?

According to Ponraj, ResMed has proven it can achieve scale efficiencies with operating margin expanding to over 30% in the last twelve months from 22% in fiscal 2011.

He forecasts that ResMed’s selling, general and administrative (“SG&A”) expense will continue declining as a percentage of ResMed’s sales. As this is a big chunk of the firm's operating expenses, this could lead to a further increase in operating profit margins.

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

For both of these questions, Ponraj says there aren't any major red flags. 

9. Does the company have depth to its management?

Mick Farrell is ResMed’s current CEO and is the son of the company’s founder, Peter Farrell. Ponraj thinks ResMed has a strong management team overall and that management’s responsibilities are shared appropriately across regions. 

10. How good are the company's cost analysis and accounting controls? 

ResMed has achieved an average operating margin (profits before interest and tax) approaching 28% over the past five years.

ResMed’s operating margins are in the same ballpark as Fisher and Paykel Healthcare (ASX: FPH), which is perhaps their closest comparable domestically. However, ResMed’s operating margins have been far more stable over time. Consistently good operating margins are a sign that ResMed is doing a good job of controlling its costs. 

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

This question appears to be getting at moat sources.

Our ResMed analyst Shane Ponraj awarded ResMed a Narrow Moat rating based on switching costs and intangible assets such as patents. Switching costs stem from physicians being trained to use ResMed devices and growing to trust the data and clinical outcomes provided. As a result, they may be reluctant to re-train or risk using a different product.

As for industry structure, Ponraj sees the duopolistic nature of the sleep apnea treatment market as something that few of ResMed’s customers in the medical device sales business would want to change.

This is because having fewer suppliers reduces the number of device manufacturers they have to deal with. It also cuts the number of different product ranges they need to become familiar with. 

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

I would say that ResMed’s continued investments in R&D, home health software and alternative treatments for sleep apnea suggest that management has a healthy long-term orientation. 

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

This is probably a question of financial position and capital allocation.

Ponraj views ResMed’s balance sheet as being in sound condition. Financial risk is low given low revenue cyclicality, high cash conversion, and most costs being variable (only growing when sales are likely to grow too). He forecast the company to be in a net cash position over the five-year forecast period, while also funding its growth and maintaining a 28% dividend payout ratio.  

None of this would suggest that the company needs to raise excessive amounts of equity to fund their growth. As I covered in my article on ResMed’s capital allocation, growth has largely been financed by profits and debt taken out to fund acquisitions. This debt has then been paid back down using earnings. 

14. Does the management talk freely to investors about its affairs when things are going well and when troubles or disappointments occur?

Ponraj gives ResMed a clear thumbs up here, citing its open response to investors amid concerns that weight loss drugs may reduce the demand for ResMed’s sleep apnea treatments. He also says that ResMed also hosts investor and analyst calls at least once a quarter to keep people informed about the company’s progress. 

15. Does the company have a management of unquestionable integrity?

"Unquestionable" is a high bar but Ponraj hasn’t seen anything from ResMed’s management team to suggest otherwise. He also thinks that the executive team’s incentives are appropriate and aligned with the goal of increasing shareholder returns.

The verdict

ResMed appears to satisfy most if not all of Fisher’s criteria for high quality growth stocks. But, of course, this isn’t enough to make an investment decision.

You also need to consider whether the shares are a good fit with your goals and strategy, and whether the shares are trading at a reasonable price.

At a price of around $37 per share on on November 21, ResMed (ASX: RMD) shares traded modestly below Shane Ponraj’s $40 per share Faiir Value estimate.

Learn more about buy and hold investing

If you like the idea of buy and hold investing, you might like my colleague James Gruber's lists of ASX stocks and US stocks he'd own forever at the right price.

To learn more about working out if a share price is reasonable, see Mark LaMonica's checklist for valuing a share.

For Morningstar Investor members, I would also recommend Brian Han's excellent Your Money Weekly piece on the addiction of taking action. I think Fisher would approve.

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