Proof: Corporate Culture Matters in Investing

Lots of investors think the key to finding wealth-creating returns is to meticulously study a company's financial statements.

That strategy may work, but if you're a beginning investor who isn't sure where to start, know that this is far from the only way to succeed in the stock market. Investigating a company's culture can be just as important -- if not more so -- than studying its income statement.

Investing by listening to employees
If you're not familiar with the website Glassdoor, here's the elevator pitch: By offering an honest appraisal of your place of work, you have access to reviews of other companies made by other users.

Starting in 2009, the website began listing the Top 50 Places to Work, as rated by employees. If you had picked out the top five publicly traded companies back in 2009, this is what your returns would look like now, including dividends.

Company

Returns

General Mills

92%

Netflix

1,160%

Adobe

151%

Whole Foods

1,110%

Google

234%

Source: Glassdoor.com, YCharts. Data current as of Dec. 16, 2013.

Had you invested equally in these five companies, a total investment of $10,000 would now be worth $65,000. In contrast, an investment in the S&P 500 would only be worth $20,400 -- that's a massive difference.

Does this prove that investing in culture is a surefire way to profit? Not so fast. Though 2009 is the best starting point we have -- because it is the earliest available from Glassdoor -- we would be remiss to consider only a single year's corporate-culture winners. Let's look at how other winners have fared in the intervening years.

Source: Glassdoor, YCharts, author's research.

As you can see, the results are significantly muted. In three of the four years, the Glassdoor winners matched or outperformed the S&P 500, but not by such outsized amounts. That being said, if the average annualized returns are calculated excluding 2009, the Glassdoor portfolio still outperforms the S&P 500, 22% to 18%.

I think there's an even better way to show that these companies have something special driving them forward. I went back over all five years and compared the returns of each company with those of its closest competitor. In some cases, a comparable competitor didn't exist, as is the case for Shutterfly or Facebook. Those companies were thrown out.

The results speak for themselves: The Glassdoor companies outperformed their closest competitors 70% of the time and saw an average annualized return of 25.6% versus their competitors' 20.2%.  

What does that mean for this year's winners?
This year, Glassdoor added on to its traditional list by offering up the top medium-sized companies as well. Below are the top 10 publicly traded companies -- the first five being large, the last five being medium-sized -- and their closest competitors.

Glassdoor Companies

Closest Competitor

Twitter (NYSE: TWTR  )

Facebook

LinkedIn (NYSE: LNKD  )

Monster Worldwide 

Eastman Chemical

BASF 

Facebook

Twitter

Guidewire

Ebix 

Travelzoo 

Groupon (NASDAQ: GRPN  )

Cornerstone OnDemand 

Saba Software 

RetailMeNot (NASDAQ: SALE  )

Groupon

Demand Media

AOL

TASER 

Applied Energetics

Source: Glassdoor.com, author's research

We already know that, historically speaking, companies on this list will outperform the market. But this list might be even more useful if you're looking at industry-specific companies as compared to their competitors. 

By looking at this list, there are a number of conclusions I can draw.  First, social-media companies Facebook, LinkedIn, and Twitter -- despite investor fear that all three of these are fads -- are worth looking into. There's no denying that these three claim a huge portion of our Internet time; each is among the 10 most-visited websites in America.

Furthermore, I would argue that investors should think twice before investing in Groupon, as it has not one, but two competitors that made the list of best places to work. While I'm not particularly excited about Travelzoo's prospects, I believe RetailMeNot, a recent IPO, is worth looking at if you're a growth investor.

But the bottom line is this: When you're investing in a company, it's not just a sheet of paper or an electronic statement. You are buying a share of the culture of a company -- the sum total of all the interactions between the employees who go to work there every day.

The type of interactions they have -- the culture that dictates that interplay -- is more important than you think. And while experiencing corporate culture firsthand is the best way to gauge it, Glassdoor offers a more practical way to gain some insight.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2013, at 2:30 PM, SkepikI wrote:

    Brian: A VERY interesting article. It certainly made me stop and think and I expect I will read it several times again to digest its import to ME.

    Very few of the enterprises you list are on my A list of investments. General Mills is. But as a believer in "human capital" and the magic it can perform in seemingly the most fluff laden enterprises, I just may have to review my analysis. If the best people can do anything well, its turn dirt into gold even for lame fads like Faceplant (yes I am a curmudgeon)

    The one thing I would question is just how good Glassdoor is at taking what is essentially highly judgmental and making it anything like dispassionately factual and practical.

  • Report this Comment On December 26, 2013, at 1:31 PM, HoosierRube wrote:

    The question of 'correlation' vs. 'causation' is appropriate here.

    I feel these kinds of analogies are just so much 'feel good' press with little to do with reality.

    What you see are companies awash in cash. I've seen the ebb and flow of employee satisfaction which mirrors the companies ups and downs.

    It's easy to be laid back when the money is flowing in effortlessly but a disaster when competition strikes and everyone must row harder.

    That's the fact of life. Ignore it at your own peril.

  • Report this Comment On January 05, 2014, at 4:33 AM, redhegon wrote:

    Of course a company with great corporate culture could be currently either expensive or cheap. But culture could be a factor for modifying valuation to give good culture a bonus.

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