Are the "Best Companies To Work For" Your Next, Best Investment?

Recent, academic research indicates that you can profit by investing in the "Best Companies To Work For." And, that's fantastic news... for investors focused on the U.S. market. Unfortunately, you'll have hard time finding the "best companies" for one of the hottest markets over the past decade: China.

Luckily, I have. Here's a look at how important employee satisfaction is to your profits in China.

Why you should invest in the "Best Companies to Work For" in China
In early 2013, the Russell Investment Group discovered that publicly traded companies in Fortune's 100 Best Companies To Work For list returned an average of 10.8% a year since 1998. For comparison, the S&P 500 has only returned about 3.3% on average.  

And this study isn't an anomaly.

In a 2008 paper titled "Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices," Wharton Professor Alex Edmans analyzed the same Fortune 100 list from 1998. Using a value-weighted portfolio, he found stunning results. By 2005, the portfolio outperformed industry benchmarks -- and beat the market by 200%!

What's even more jaw-dropping is when you compare the best companies to the worst.

In a 2010 study by Hewitt Associates, companies with high employee engagement levels (65% or greater) beat the market by 19% in 2009. But, they beat "un-engaged" companies (levels of 40% or less) by 63%! And, that's just one year.

As you can see, there's good reason to believe that happy employees can make you a happy investor. But, how does this relate to your Chinese investments?

Back in August 2012, one of China's leading recruitment websites, ChinaHR.com, created a list of the top 50 companies to work for in China. The website identified these companies after surveying 100,000 employees and university students on four factors: the companies' compensation, brand, corporate culture, and career development.

After recreating that list below -- showing only the Top 10, publicly traded, Chinese-based companies -- the best companies could deliver you an awesome return.

Source: List from ChinaHR.com via China.org.cn. Returns from Google Finance. 

If you average the returns of this top 10 list, you could have easily trounced the S&P 500 by over 10 percentage points!

And why you shouldn't
If you thought you could get an even better return by investing in a few companies on the list, think again.

Just look at China Mobile. Despite its No. 1 spot, it's the worst-performing stock on the list. Even more damaging to this best company theory, China Mobile has been the No. 1 best company to work for four years running. Moreover, when you compare No. 3 Baidu and its stock return to others on the list, Baidu's investment into employee nap lounges, yoga and Pilates studios, and Zen gardens seem like wasted effort.

Source: China Mobile.

Now, before you call into question ChinaHR.com's methodology, consider that statistical "averages" do not necessarily work out for individuals. When you focus on one or two companies, factors beyond compensation, brand, corporate culture, and career development come into play.

For China Mobile, perhaps the biggest factor swinging this stock are ever-present rumors of carrying Apple's iPhone. First, you heard it would come last summer, then this fall, and now early 2014. And, every time China Mobile fails to deliver, the stock drops -- all the while No. 28 China Telecom and No. 45 China Unicom already carry the iPhone.

In Baidu's case, August 2012 was when Wall Street panicked that Qihoo 360 would eat Baidu's lunch. Throughout the beginning of 2013, the stock fell to new lows. Now that the Street no longer sees Qihoo 360 as a real threat, Baidu stock is finally rebounding.

Even for the companies that saw fantastic returns, you could argue that there was something more to their stock returns than just being part of the best companies to work for in China.

Yes, SINA has a great training department that offers employees a complete corporate-development system -- encompassing counseling with department heads, on-the-job training, and job rotations. But, the stock was lagging this year until China's e-commerce juggernaut Alibaba bought an 18% stake, signaling confidence in the company.

Similarly, New Oriental Education may screen employees for energy, optimism, and a high sense of responsibility. It may also have a culture of "care and love," as Executive Vice President Xiangdong Chen says. But, the company's success may simply be thanks to "education fever" -- profiting off of parents who are willing to dish out an average of $1,000 for SAT trips to Hong Kong and up to $8,000 for tutoring.

Should you invest in China's "Best Companies"?
Not quite. As you can see, there is no set and simple trick to outsized stock returns. Employee satisfaction over (a) long periods of time and (b) averaged over a good handful of stocks may make you rich. But, when you start investing in individual companies -- especially in China, where you're at a geographic disadvantage -- the "best companies" may be spectacular a dud like China Mobile.