By Stockpickr Guest Columnist Fred Fuld of Stockerblog.com

Recently, I had the pleasure of interviewing Ken Fisher, head of the $30 billion Fisher Asset Management, a very longtime Forbes columnist and author of the books Super Stocks , The Wall Street Waltz , 100 Minds That Made the Market and The Only Three Questions That Count: Investing by Knowing What Others Don't .

He is also coming out with a new book in the fall, The Ten Roads to Riches: The Way the Wealthy Got There (And How You Can Too!), published by Wiley.

Stockerblog.com:In your book Super Stocks as well as in your latest book, Only Three Questions That Count, you discussed extensively the price-to-sales ratio, saying that it isn't as useful. How did you happen to find ant utilize that ratio to begin with?

Fisher: In a world a long time ago, long before there was wide access to computing, I used to try to look at companies that were hemorrhaging badly that had everyone scared to death of them and losing lots of money. I would, in those days, go looking through The Wall Street Journal, looking at was then a very broad display of earnings reports, showing company revenue and profit or loss per share. So I would look for companies with huge losses and then I would sort around among them and then I would look at ones that had low market values in relations to sales, as a way to see upside leverage, to see if they could turn their operating loss condition around.

The fundamental question was, if the company is losing money, if it made X profit margin, what would its P/E be today, and that kind of led me to the price sales ratio as a way to normalize that. It was all in a world where any form of screening was difficult to do whereas today most forms of screening are quite trivial to do.

Stockerblog.com: Now, I know you say that the P/E ratio is no longer an indicator for undervalued stocks …

Fisher: I didn't say that. I said it's not nearly what it once was. I didn't suggest that there is no utility to it; in fact, in my Forbes column, I'll say company X sells at a P/E of X and Y times revenue and Z yield as a way to get perspectives on the same issue.

That realm of the profitless company, 30 years ago was no man's land, and there was tremendous inefficiency there. In a world where most paid attention to P/E and where, by then, the ravages of inflation had already made prices to book hard to compare company A to company B because inflation distorts book value, the price sales ratio appeared to be a current way to get a sense of how big is the stock compared to how big is the company, and that you could extrapolate from that in the future, profit margin Y, what the P/E would be.

Stockerblog.com: Do you think the price-to-sales can still be used today to compare companies within an industry or within a sector?

Fisher: It's not as useful as it once was because 1.) screening is so easy that there is less value from screening as there once was, and 2.) the price-sales ratio today is a well-known concept, so because it's a well-known concept, people use it, so it has less value than that which is unknown.

Stockerblog.com: So it's built into the market now.

Fisher: I wouldn't say completely, because, it's still true, and it's verified by all kinds of behavioral studies, there tends to be a natural behavioral tendency for people to overreact to problems as well as overreact to successes. So when a company is losing money, and hemorrhaging badly, people tend to be overly scared away from it. So there's still something there but not as much as there once was.

----

Fisher didn't provide any stock recommendations for the interview, but many can be found in his Forbes column. For example, in the May 19 issue, he favored Banco Bilbao Vizcaya Argentaria (BBV), with a P/E of 7, a P/S of 1.87 and a PEG of 0.42; Novartis AG (NVS), with a P/E of 10, a P/S of 3.06 and a PEG of 2.17; Royal Dutch Shell (RDS.A) (RDS.B), with a P/E of 6 and a P/S of 0.49; and Sara Lee (SLE), with a forward P/E of 12, a P/S of 0.73 and a PEG of 2.

His latest book, Only Three Questions That Count , is available at Amazon.

For a Stockpickr portfolio of Ken Fisher's top positions, including Schlumberger (SLB), Petrobras (PBR) and Freeport-McMoRan (FCX), please click here.

Author does not own any of the above mentioned stocks.

Posted on Aug. 25, 2008