3 Stocks, 3 Stars

Great customer service may not make a stock a great investment. But it certainly doesn't hurt. So I wasn't exactly surprised to see that three of the 15 companies highlighted in Fast Company's recent Annual Customers First Awards are Motley Fool Stock Advisor picks -- Netflix, Whole Foods Market, and Best Buy.

The customer's always right
How many times have you wondered what happened to that old adage -- the customer's always right? For those public companies that lag on service, one might wonder how they could miss the most elementary of principles ... and what kind of impact consumer rage could have on their futures.

On the other hand, companies that make customers happy tend to have a leg up in solid, reliable, and sometimes astronomical sales and earnings potential. After all, customer loyalty brings in the bucks -- over and over and over again.

Let's face it, before Netflix came along, many movie aficionados were likely fed up with brick-and-mortar chains like Movie Gallery's (NASDAQ:MOVI) late fees -- fees that bolstered Movie Gallery's fortunes at the expense of customers. It was about time somebody swooped in and gave customers an alternative.

Now, take the traditional grocery business; many grocers don't bring anything extraordinary to the table (or the aisles). For years, industry players like Albertsons (NYSE:ABS) have often capitalized more on the idea of convenience and low prices than on service or innovation.

Enter Whole Foods. The supernatural grocer rode in on the organic and natural foods trends while treating its employees exceedingly well, ensuring that they weren't the cranky, uninvolved workers that one might encounter at traditional grocers. It's part of Whole Foods' mission statement that happy employees make happy customers, creating happy shareholders.

What about Best Buy? Fast Company points out that Best Buy puts its customers first by tailoring specific stores toward their strongest customer demographics, focusing on the items these folks were specifically looking for -- this is, in fact, Best Buy's "customer centricity" initiative that is highlighted in the company's Form 10-K.

These stores target the following types: "affluent professional males, young entertainment enthusiasts who appreciate a digital lifestyle, upscale suburban moms, families who are practical technology adopters, and small businesses with fewer than 20 employees." (In fact, Best Buy's vision is "to make life fun and easy for consumers.") You can go to a competitor like RadioShack (NYSE:RSH), but they aren't known for these kinds of innovations.

Happy customers, happy shareholders
A company that makes its customers grit their teeth and shake their fists is going to stumble, even if it has no meaningful competition and its comeuppance doesn't occur for years down the road. I'm betting that all of you have at least once ended a relationship with a company because of bad customer service, whether it was switching phone companies or promising you'd never darken a particular retailer's door, fly a certain airline, or do business with a certain bank again.

We can take the customer service-focused idea one step further by pointing out that the stocks that Fast Company lauded have also been great performers for investors. Check out the long-term sales picture for all three of these companies.

Netflix, of course, stands out with its whopping 152% increase in sales in five years. That's not surprising, given its innovative entry into a totally new way of delivering DVDs via the Internet and through the mail. But we certainly can't complain about the consistent, double-digit sales growth exhibited by the other two companies.

Now, let's look at several competitors in those same industries.

It's only fair to point out that in many cases, the law of large numbers can affect sales figures for older companies, or those that have expanded more rapidly than others. In most cases, it's inevitable that sales will slow over time as revenues grow larger and the companies' markets become saturated.

However, there's also a good argument that customer-friendly innovation has been luring the cash from consumers' wallets, making it possible for shrewd competitors to thrive, a theory that's displayed in top-line growth.

Shiny, happy people
Would you want to invest in a company that has a great balance sheet or well-known brand but an increasingly bad reputation? A bad reputation might be a red flag that at some point, a competitor will give customers another option, one they will be more than happy to accept. Other companies that Fast Company lauded on the same principles included Build-A-Bear Workshop (NYSE:BBW), Craigslist, Intuit (NASDAQ:INTU), Kiehl's, and PaneraBread (NASDAQ:PNRA).

A customer-friendly outlook is but one element that can make a great company into a great investment, and Motley Fool Stock Advisor examines the many important angles to successful investing on a regular basis. Want to find out more? Check out the spectrum of companies that David and Tom Gardner have recommended for Stock Advisor over the years and get two new picks per month -- and chat about their outlooks, customer service tactics, or anything else on your mind with the many Fools on our dedicated discussion boards -- by taking a 30-day free trial today. To date, Stock Advisor picks have an average return of 60%, compared with 20% for "the market" (as measured by the S&P 500).

This article was originally published on Nov. 11, 2005. It has been updated.

Alyce Lomax does not own shares of any of the companies mentioned. Intuit is a Motley Fool Inside Value recommendation. The Fool has adisclosure policy.