Does Consumer Popularity Equal a Better Stock Pick?
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, 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.
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.