Can Well-Run, Employee-Friendly Companies Outperform Stock Market Averages?

It’s a popular question among some personal finance enthusiasts: is it better to invest in index funds or individual stocks? There can be evidence pointing in multiple directions, though it’s become more popular of late to focus on index funds.

Personally, I’ve been leaning that way. My approach has evolved to having index funds as a foundation for stock investing, with some opportunistic purchases along the way, based on market events and historical anomalies.  With respect to the latter, regular readers of Squirrelers have seen period analysis I’ve done with provides reasoning for occasionally making such purchases. Just to point to 2 examples, analyses done on stock market returns by month as well as market reactions to the japan tsunami disaster can show how there are times where there truly are opportunities to jump  in.

That being said, as I mentioned up front, I’ve been liking index funds – and regular investments in them whether large or small. With that in mind, I set out to do an analysis of comparing individual stocks from “best company” lists to the S&P 500.

Hypothesis – Phase I

My original hypothesis was that if you looked at a list of so-called top companies, or best companies, etc – you’d find that they probably don’t do much better than the S&P 500 as a whole in terms of stock returns. Therefore, if you invested in an index fund with low turnover and low expenses, you would do better than you would with more active trades or just buying a bunch of individual stocks. In this case, I’m basing this on changes in stock price.

Methodology – Phase I

The steps I decided to take involved looking at a list of top companies, as I alluded to earlier, and comparing stock performance to broader markets as a whole.  In order to do that, I searched for top companies, and located a list of Business Week’s top global companies. I chose the 2009 list of top 40 companies, as that would give me 2 years of data afterward for which I could use in my comparison.

The article was dated October 1 of that year, so ended up selecting October 2009 through September 2011 as my 2 year analysis period. Additionally, in looking at the 40 companies in the list, I actually included the ones that were publicly traded on U.S. exchanges. This meant that the analysis consisted of 14 companies.

What I did was to take the 14 companies and calculate the change in stock price during that 2 year period for each one. Additionally, I did the same thing for the S&P 500 during that time period. Then, I did a simple average of the 14 calculations and compared to the S&P 500 results for those two years.

Results – Phase I

Here are the findings:













As I looked at the results, it appeared that the hypothesis did not turn out to be correct. Interesting.

Rather, it looked like the basket of analyzed companies from the 2009 best company list significantly outperformed the S&P 500. In fact, the increase in stock prices over that time period was 28% for the best companies, versus 10% for the broader market basket.  Now, if you look at the list, there were two clear outliers: Amazon and Apple. Fair enough. However, even when those 2 companies are removed from the analysis, the remaining 12 still have a 12% increase, which outpaces the 10% of the broader market.

Well, then. So much for the idea that an index would be better than some list of best companies!

Hypothesis – Phase II

After taking a look at the preceding analysis based on the aforementioned best companies list, I thought it might be worth it to try again with a different list of companies. Maybe then we could see if we got a different result. I didn’t originally plan to look at another list, but this “Phase II” seemed like a good idea to continue this line of thought. Again, recall my original thought that index funds would perform just as well.

Methodology – Phase II

In this second scenario, I examined the list of Fortune’s best companies to work for, also from 2009 to keep things consistent with the prior analysis. Here, the date noted was February 2009, so I used data from February 2009 through January 2011. In this case, I went from the top of the list down, and selected companies that were publicly traded. Additionally, I chose 14 companies in order to align with the assessment of the Business Week list, and chose the highest ranking ones starting from the top.

As I did previously, I took this set of companies and calculated the change in stock price during that 2 year period for each one while doing the same thing for the S&P 500 during that time period. Once again, I did a simple average of the 14 calculations and compared to the S&P 500 results for those two years.

Results – Phase II

Here are the findings:













First of all, this was a period of an extraordinary rebound in the market. That’s evident in the 56% return in the S&P during this 2 year time period. Granted, most people saw their portfolios tumble in value prior to that time period, so this was a market recovery in some ways.

That being said, the performance of the top 14 traded companies on the list of best companies to work for showed a 140% increase in stock price, easily exceeding the 56% gain of the S&P 500 during that time.

This second list had only one company in common with the first one: Google. The rest of the companies were different.

Overall Implications

Putting it all together, it appears that the hypothesis that index funds could match “best company” list performance didn’t find it’s way into the results. Rather, the best company lists outperformed the market average by a broad margin.

Now, I suppose that there could be other lists that under perform the market. If those were viewed in a stand alone analysis, we might be having an entirely different conversation. So, we can’t jump to any conclusions that such lists always outperform the market. I doubt that would happen, as rule anyway.

However, it does lend some credence to the notion that perhaps there are some types of companies that just do perform better than others, based on pre-defined criteria. Maybe the reality that these were companies that were perceived to be well-run and/or good employers is indicative of their potential to beat expectations and increase in value?

My Questions for You

What do you think of the idea that investing in companies that are regarding as well-run and great employers can help yield better returns than investing in the broader market?

What criteria do you use to evaluate companies in which you might invest?

Where do you stand on the issue I brought up in the first two paragraphs, where I expressed the view that index fund investing is a great primary foundation, with other investments made only made opportunistically?



  1. says

    I’d like to quote Buffett on indexing vs. individual stock picking (and I agree with him): “Diversification may preserve wealth, but concentration builds wealth ”

    Indexing will spread your risk (and reward). Since not all of us have the time, acumen or energy Buffett has, this is a great strategy. But that doesn’t mean stock picking is useless. Returns are great, but then so are the risks.

    If you picked Enron during its glory days, you would’ve made more than the market and most probably more than if you had stuck with indexing.

    When Enron went down, there would’ve been little impact on the indexer and a significant impact on the stock picker.

    High risk, high reward. Buffett was spot on.

    • Squirrelers says

      Moneycone – that’s part of the draw to index funds, that you’re balancing risks and rewards to a balance point that works for the average investor. Not to mention the low transaction costs being lower. That said, it’s eye opening to see that such “best company” type of lists included companies whose stocks ended up vastly outperforming the broader market!

  2. says

    Stock prices ultimately following earnings and profits. A well run company that treats its employees well is likely to treat its customers well also. Happy customers keep returning and confer a significant competitive advantage. Look at any successful company and you are likely to find a loyal following.

    • Squirrelers says

      cashflowmantra – what’s interesting is that one might think that such factors would already be cooked into the stock price. Maybe the markets aren’t as efficient when it comes to such companies with these positive attributes. Perhaps these attributes and their effects are undervalued?

  3. says

    I own both index funds and individual dividend stocks. I am not sure which one performs better, I will evaluate that at the end of the year.

    It is almost like you have to treat your individual stocks like an index fund in the sense that you can’t beat yourself up if one goes in the tank and you can’t think you are the best stock picker in the world if one goes through the roof. Luck and timing can play a huge role in stocks (in my opinion. Like when I bought a stock and it was bought out a week later. That was great!)

    • Squirrelers says

      Kris – luck and timing can play a role. In the case of these best company lists, I wonder how much is luck and how much is due to these companies apparently being regarded as well run and/or good employers? Maybe these attributes are key in driving company performance forward?

  4. says

    I’ll just throw this out there – I’m sure there is a management performance edge. However, in most cases it will be:
    1) Small (and possibly overrated)
    2) Hard to identify
    3) Take a while to be realized after new management
    4) Still be subject to market whims

    Taking #3 and #4 together, you may be able to identify sound management, but it might take a while to pay off. If you’re willing to be patient? I bet this strategy eventually pays off.

    • Squirrelers says

      PKamp3 – I think you make some good observations here, and they’re in line with what I might have thought before. Actually, I might have been a bit more skeptical previously, and believing that the market probably has these factors baked into the price. Now, I’m thinking that there might be an undervaluation of these attributes in existing stock prices.

    • Squirrelers says

      Marie – well, the analysis is based on stock price increases from the month of the “best” company list, going forward for 24 months. If someone had made these investments when the lists were announced, they would have made a boatload of money!

  5. Eric says

    Enron was on the list in 2000. It’s interesting to see those numbers over those time spans, but it would be much nicer to see it over 10-12 years.

    Blindly picking the top publicly traded companies isn’t investing, it’s just speculation. I think the list might be a good place to start, as long as the companies fit within whatever you strategy is. I’m still trying to figure out what my strategy is.

    • Squirrelers says

      Eric – point well taken. I took a 2 year time period, who knows what a 10 year lookback would show. That said, 2 years is not insignificant and the results were eye opening to me. I was expecting to see no difference, being someone who enjoys index funds. Maybe well-run companies that are well regarded are undervalued? Hard to say.

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