Can This Simple Strategy Give You 70% Annual Returns?

Some time ago, ESPN did a survey on the greatest sports coaches of all time. Not surprisingly, John Wooden -- coach for 27 years of the UCLA Bruins men's basketball team -- won hands-down.

The decade before Wooden arrived on the scene, the Bruins had amassed a mediocre record, winning just over 40% of their games. Over the next quarter-century under Wooden's tutelage, they would win 80% of their games, including 10 national championships -- seven of them in consecutive years.

The take-away here is clear: Leadership -- and the culture that leadership cultivates within an organization -- matters.

An investing edge
You'll never hear me argue that going over a company's financials isn't important. All investors should be intimate with the financial statements of their investments.

Here's the thing: Every other investor out there has access to the same information. They, too, are scouring the latest quarterly reports before moving money into and out of certain stocks.

To gain an edge, we need to complement what we already know with information that other investors aren't looking at.

Glassdoor.com
One website that I've found valuable in my search for such scuttlebutt is glassdoor.com. The premise of the website is fairly simple. Employees anonymously answer a set of questions about their employer and rate their overall job satisfaction. By contributing their opinion, that person then has access to all of the other reviews that have been posted ... for free.

I think the culture that exists within a company can go a long way in explaining continued success: Happy employees are efficient and effective employees.

While certainly not scientific -- and it is no doubt open to manipulation -- I wanted to see how well such reviews do at predicting stock market success.

Every year, glassdoor.com produces a list of the top 50 companies to work for, based on employee reviews. I took this list from 2009 (the earliest year available), and vetted out all companies that weren't publicly traded. Also, I wanted to focus on small companies, so I took out any stock that had a market cap above $10 billion at the beginning of 2009. Below are the total returns to date from the remaining companies.

Source: Yahoo! Finance, Glassdoor.com, author calculations. As of June 7.

Wow! Those are truly market-thumping results. Over the past 29 months, a portfolio of just these 10 stocks would have a compounded annual growth rate of roughly 70%. Such results are absolutely unheard of.

To be fair, 2009 was one of the best years the stock market has ever seen. To see if this wasn't just a flash in the pan, I took the 2010 list and ran the numbers. Though not as spectacular, these stocks have handily beaten the market as well.

Source: Yahoo! Finance, Glassdoor.com, author calculations. As of June 7.

Such results obviously lead to the question:

Who is on the 2011 list?
This year's winners were dominated by either privately held companies or ones with market caps above $10 billion. That being said, five smaller companies did make the cut: Southwest Airlines, Overstock.com, Shutterfly (Nasdaq: SFLY), National Instruments, and Synopsys.

Of course, there's certainly no guarantee that this year's list will produce the same results as years past. But if you're looking to do some stock research in search of promising small- and mid-cap companies, these stocks wouldn't be a bad place to start. Add this year's companies to your watchlist if you want to keep tabs on how they're doing.

• Add Southwest Airlines to my Watchlist.
• Add Overstock.com to my Watchlist.
• Add Shutterfly to my Watchlist.
• Add National Instruments to my Watchlist.
• Add Synopsys to my Watchlist.