It's generally accepted wisdom that "corporate insiders" know more about the companies they work for than the rest of us do. So generally accepted, in fact, that famed hedge fund consultant George Muzea wrote a book based on the idea, The Vital Few vs. the Trivial Many (examining the timing of insider stock purchases in relation to subsequent stock performance).
But "accepted" or not, is the idea correct? Do employees really have that much better insight into their companies' prospects than the rest of us do? Can their opinions predict how well their companies' stocks will perform in the future?
We asked our friends at employment research site Glassdoor.com to look into the question for us, examining whether employee self-ratings of three of America's biggest parcel delivery companies -- FedEx (NYSE:FDX), UPS (NYSE:UPS), and, just for fun, the United States Postal Service -- had any relation to how these "companies" were performing.
The results were illuminating.
The big picture
Overall, Glassdoor's analysis shows that FedEx employees are broadly more optimistic about their company's prospects than are FedEx's competitors -- and this has been true for quite some time. Over the 14 quarters covered in this report, FedEx employees gave their company an average "3.6" rating for quality. UPS employees, in contrast, scored their company a 3.3, and U.S. Postal workers gave USPS a lowly 2.8.
These ratings are instructive, to an extent. From the end of Q2 2010 through the end of Q3 2013 -- the period covered in the survey -- FedEx shares slightly outperformed those of UPS, rising 58.5% over the 14 quarters, to UPS's 57.3%. (USPS obviously has no stock price. But given that hardly a week goes by without some newspaper or other reporting on USPS' massive quarterly losses and frequent flirtations with bankruptcy, if USPS did have a stock, chances are it would not be doing well).
And yet, viewed more closely, it's hard to say that fluctuations in employee opinions of their companies tell us very much at all about how these companies' stocks will perform in the near term.
Putting the big picture under a microscope
Muzea, in his book on insider trading, made the observation that even savvy corporate insiders have difficulty predicting how their companies will perform six months into the future -- and, apparently, even that limited level of precognition is not easy to achieve.
In Q4 2010, FedEx employees rated their company's prospects a "3.8" -- above average for the company. Yet over the six months following that rating, FedEx shares only barely tread water. By the end of those six months, Q2 2011, FedEx employees were even more optimistic about their company -- but for no good reason. Instead of soaring, FedEx lost 30% of its market capitalization over the next three months.
Granted, the supreme confidence that FedEx employees placed in their company for most of 2012 and 2013 has finally been rewarded by a surge in stock price over the past six months. But still, the predictiveness of FedEx's employee ratings appears to be largely hit-or-miss.
Similarly, above-average optimism at FedEx rival UPS in Q3 2011 was quickly reinforced by strong stock performance at UPS over the ensuing six months. But similar confidence expressed in Q1 2012 wasn't. (Instead, the stock fell 9%). It's really only been over the last nine or 10 months that we've seen relatively high employee confidence matching truly strong stock performance at UPS.
Now, does all this mean that the idea of insiders knowing more about their companies than we do is bunk? Not precisely.
As Muzea explains in his book, when looking to insiders for clues to a company's success, it's crucial to know exactly what kind of insider you're watching. For example, "actions of officers and vice presidents" -- people who see all the moving parts and know how an organization as a whole is performing -- are particularly important and instructive as to a company's prospects. Conversely, the opinions of run-of-the-mill workers, who may not see much of a company outside their own individual departments, may not be useful for figuring out how the company as a whole is doing.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.