How to Pick the Best Stocks? Listen to Customers

Many consumers believe that customer service is everything. It might not be everything. For example, you have to enjoy the food you’re eating at a restaurant in order to return and give that location repeat business. However, superior customer service is absolutely a necessity in today’s consumer environment. This isn’t as much about today’s consumer demanding more, which is what most people think. While that’s a factor because today’s consumer is more value-conscious and always wants the most for his or her money, it’s the rating and review sites that make the biggest difference.

For instance, nothing frightens a hotel chain more than a bad review on TripAdvisor Inc. (TRIP). The same can be said for restaurants and bad reviews on Yelp Inc. (YELP). But there is a difference. Hotel chains are always operated with a lot of money and upper management is very involved. With restaurants, you can have everything from a public brand to a privately-owned hole in the wall where management doesn’t care about bad reviews or the quality of its food and/or customer service. (For more, see: How Yelp Adds Value to Local Businesses.)

Customer Service Ratings

The lists below will be separated into top-rated customer service and lowest-rated customer service. There are more companies on the former list, which is good news. The lists will be determined by Tempkin Group scores, which rates customer service on three factors: functional, accessible and emotional. The goal here is to see whether or not the companies in the top-rated customer service category have outperformed those in the lowest-rated category in regards to stock performance over the past year. (For more, see How Corporate Culture Affects Your Bottom Line.)

Since evaluating a company goes beyond customer service, other key metrics will be included. A well-run company should perform well in most, if not all, key metric categories. In addition to 1-year stock performance, these categories will include revenue growth, net income growth, debt-to-equity ratio and operational cash flow. While dividend yield doesn’t indicate good or poor fiscal performance, it will be included since it might factor into your investment decision.

In regards to revenue growth and net income growth, if the company has delivered consistent growth over the past three fiscal years, you will see a “Y” for “Yes.” If the company has failed to deliver consistent growth over the past three fiscal years, you will see an “N” for “No.” However, the key here is to pay attention to stock appreciation or depreciation. (For more, see: Become Your Own Stock Analyst.)

Top-Rated

Company Ticker	1-Year Stock Performance (as of 10/19/15)	Revenue	Net Income	Debt-to-Equity Ratio	Dividend Yield
AMZN	85.23%	Y	N	1.53	N/A
PZZA	58.80%	Y	Y	2.75	1.00%
WBA	44.78%	Y	N	0.51	1.64%
RAD	34.83%	Y	Y	17.32	N/A
SBUX	62.33%	Y	N	0.50	1.08%
WEN	6.74%	N	Y	1.38	2.51%
AZO	45.28%	Y	Y	N/A	N/A
PNRA	12.14%	Y	N	0.15	N/A
SONC	10.31%	N	Y	25.07	1.47%
LOW	38.35%	Y	Y	1.31	1.53%
AAP	40.33%	Y	Y	0.64	0.13%
DNKN	-6.81%	Y	Y	N/A	2.52%
KR	43.54%	Y	Y	1.92	1.10%
ORLY	65.33%	Y	Y	0.71	N/A
YUM	1.32%	N	N	1.69	1.97%
PLKI	30.87%	Y	Y	1.58	N/A
WFM	-8.91%	Y	Y	0.02	1.54%
DG	10.74%	Y	Y	0.53	1.31%
CMG	12.79%	Y	Y	0.00	N/A
DLTR	10.99%	Y	N	2.06	N/A

Lowest-Rated

Company Ticker	1-Year Stock Performance	Revenue	Net Income	Debt-to-Equity Ratio	Dividend Yield
HD	34.98%	Y	Y	2.24	1.95%
S	-29.19%	N	N	1.57	N/A
T	-1.73%	Y	N	1.33	5.62%
F	8.56%	N	N	4.67	4.01%

RadioShack also made this list. We all know how that turned out. (For more, see: The 5 Reasons Why RadioShack Went Out of Business.)

The Bottom Line

The companies in the top-rated category are more impressive, especially with RadioShack being included in the lowest-rated category. Should customer service be the determining factor in your investment decision-making process? No. Should it be one of many factors in your decision-making process for companies where customer service is a factor? Absolutely. (For more, see: Evaluating a Company's Management.)

By Dan Moskowitz

Source:http://www.investopedia.com/articles/markets/102115/how-pick-best-stocks-listen-customers.asp