Customer satisfaction is one off-balance sheet asset with the potential to predict the future stock performance of an individual company. The premise is simple and can be understood by both sophisticated and novice investors: Companies with higher customer satisfaction can perform better. They tend to enjoy more repeat purchases, market share protection, lower price elasticity, lower transaction costs and lower selling or marketing costs. Satisfied customers are therefore important for earnings, return on investments, return on assets, cash flows and future stock performance.
Another example could be a close relationship with management, or a proprietary algorithm only accessible to a single hedge fund. The one characteristic each of these examples have in common is the fact that none of them are available to the investing masses. They are only available to a few people, thus creating an informational advantage and circumventing the “information overload” issue plaguing investors and financial advisors across the globe.
It is important to remember that this off balance sheet information cannot be the sole factor used in any given investor’s security analysis. Earnings, market capitalization, dividends and other balance sheet information are all still very important factors that must be taken into consideration when weighing investment options. Proprietary information like customer satisfaction is most powerfully harnessed when it is utilized to stand on the shoulders of traditional factors and potentially generate returns above the market.
The information overload available to investors today can only provide so much value. In the hunt for outperformance, smart investors and financial advisors must look beyond conventional wisdom in the form of off balance sheet, nontraditional financial metrics to find pockets of opportunity in the market.
Kevin Quigg is chief strategist for ACSI Funds.