Does Consumer Popularity Equal a Better Stock Pick?

By MoneyShow.com  FEB 08, 2013 1:20 PM

Michael Brush of MSN Money explains how this strategy usually pays off by highlighting one of the top five retail companies best-loved by consumers.

 


As a nation of shoppers—70% of gross domestic product comes from consumer spending—we probably buy too much stuff. But look on the bright side: All that shopping could make us better stock pickers.

Even investing icon Peter Lynch took note of the advantages we can gain from watching spending trends around us—and famously invested in a pantyhose company because his wife liked its product.

Simply put, we just favor the retailers we love over those we hate, a concept you can readily extend to consumer companies beyond the mall to include those that sell us stuff like cars, telephone services, and TV channels.

There's solid statistical evidence to back this up. A portfolio that bet in favor of retailers we love, and against those we hate, returned 378% from March 2000 through the end of October, compared with a 6% loss for the S&P 500 (INDEXSP:.INX).

Do I have your interest? Fortunately, you don't have to rely on haphazard impressions to find the best- and least-loved companies.

The people who report these astonishing returns, Claes Fornell at the University of Michigan Ross School of Business and his team at the American Customer Satisfaction Index, which he founded, regularly do scientific surveys to see which retailers we love and hate the most. And they post the results online for free.

I recently asked the experts at ACSI to help me single out some of the most- and least-loved companies within their industries. It's important to remember that the picks and pans are not ACSI opinions; they're rankings based on the views of broad swath of consumers, which makes them more valid. Rankings in this slide show, published November 13, are on a scale of 100.

Here, I’ll share one of their top five—most loved No. 5: Sprint Nextel (NYSE:S).

Widely despised in 2008, Sprint Nextel has done a great job of making customers smile again. Sprint lagged even its much-disliked industry with a score of 56 four years ago. But now, thanks to improvements in customer service, better phone selection, and more competitive pricing, customers give it a 71. That's higher than Verizon (NYSE:VZ), AT&T (NYSE:T), and T-Mobile.

"It is a huge comeback for them," says ACSI director David VanAmburg. "They really invested in the customer. They went from worst to first over four years."

The Sprint brand demonstrates the potential business gains to be had from pleasing customers. Sprint has been adding customers at a healthy clip, and contract cancellations are down sharply to their lowest ever in the third quarter. Plus, revenue per contract is rising.

But customer gains at Sprint have been swamped by losses on the Nextel platform, which Sprint is shutting down. This mixed picture helps explain why Sprint stock, at $5.60, is still around its 2009 peak, despite a sharp rise this year.

A recently-announced $8 billion cash injection from Softbank (PINK:SFTBF), a Japanese telecom company which took a big stake in Sprint, should help Sprint grow, and capitalize on its customer satisfaction gains.


Editor's Note: This article was written by Michael Brush of MSN Money.

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No positions in stocks mentioned.

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