Customer Is King: Even for Stock Picks

Pay close attention to the customer when you’re picking stocks. No, not your customer (though that’s probably a good idea, too)—the customer of the company whose stock you want to buy. Here’s why: Companies that get high ratings for customer service, as measured by the American Customer Satisfaction Index (ACSI), tend to have higher earnings and stock returns, according to peer-reviewed research that appeared in the Journal of Marketing last January. In fact, an ACSI-based fund has beaten the S&P 500 for seven years in a row and has a cumulative return 133 percent higher than the S&P 500 for the period.

Pay close attention to the customer when you’re picking stocks. No, not your customer (though that’s probably a good idea, too)—the customer of the company whose stock you want to buy. Here’s why: Companies that get high ratings for customer service, as measured by the American Customer Satisfaction Index (ACSI), tend to have higher earnings and stock returns, according to peer-reviewed research that appeared in the Journal of Marketing last January. In fact, an ACSI-based fund has beaten the S&P 500 for seven years in a row and has a cumulative return 133 percent higher than the S&P 500 for the period.

That’s why the latest ACSI findings from the University of Michigan, published in February, might interest you. The good news is that the study found customer satisfaction to be at an all-time high, reaching a record score of 74.9 in the fourth quarter of 2006, up 0.7 percent from the previous quarter. Of the 13 industries measured, nine showed improvements, two were unchanged and two registered declines. Supermarkets, gasoline service stations, specialty retail stores, health and personal-care stores, commercial banks, life and health insurance, and e-commerce retailers and brokerages all registered significantly higher ACSI scores.

Department and discount stores actually recorded a decline in the ACSI score last year—driven largely by a 4 percent hit to the score for Federated Department Stores. That drop could be the result of the group’s acquisition of May Department stores and the subsequent reorganization, writes Professor Claes Fornell, the director of the National Quality Research Center at the University of Michigan’s business school. But supermarkets had a good year: the ACSI score for Publix was up 3 percent to 83; for Kroger it grew 3 percent to 76; for Winn-Dixie it jumped 4 percent to 76; and for Safeway, it rose 4 percent to 74.

The finance and insurance industry recorded an increase in its ACSI score as well, up 3 percent to 76—it’s highest since it received a 78.5 in 1994, the year these scores were first calculated. Among commercial banks, “Wachovia continues its tradition of strong satisfaction performance, up 1 percent to 80,” Fornell writes. “No major competitor is even within six points of Wachovia.” He also notes a big improvement for Wells Fargo, which gained 8 percent to 72.

Among life insurers, Met Life gained 10 percent on the ACSI, scoring a 78, while Prudential recorded a gain of 6 percent to reach 76. Industry-wide, insurance companies gained 5.3 percent, something the report attributes to declining premiums as a result of increased competition and longer life expectancies.

In the online brokerage category, Fidelity and Charles Schwab, which saw its ACSI gain 8 percent versus 2005, tied for the top industry spot with a score of 80. TD Ameritrade came in at 77. Meanwhile, E*Trade registered a 4 percent improvement to 74. The category as a whole rose 3 percent to 78.

The University of Michigan also posits that ACSI scores might actually be stronger indicators of overall consumer spending than income and wealth. “With falling oil prices, rising wages, a record low savings rate, little inflation, high consumer confidence, stable interest rates, low unemployment and now also the highest customer satisfaction level ever recorded by ACSI, it is not surprising that consumer spending is unusually strong and has helped lift the overall economy,” writes Fornell, about the ACSI findings.

“Most economic forecasts predicted a weakening of consumer spending for the final quarter of 2006. ACSI was virtually alone in suggesting solid growth.” So, it might be worth noting that the ACSI equations forecast continued growth in consumer spending of between 3.5 percent and 4.1 percent.

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