Cumulative Stock Returns: The American Customer Satisfaction Index (ACSI) Leaders vs. S&P 500
Companies with high ACSI scores typically do very well in the stock market. There are always exogenous factors that may affect the stock price of any one company over time, as well as the market overall. However, if one created a portfolio of the top 30-35 ACSI companies in their respective industries each quarter, weighted by the ACSI elasticity to customer loyalty (the relationship between customer satisfaction and customer loyalty), it would affirm both the reversal of the law of diminishing returns and the law about risk and return. It also shows exponentially increasing returns: Over the period from 2006 through 2021, such a portfolio would have generated a cumulative return of 1,788%, compared to the S&P 500 return of 429%. This equates to an annualized return of 20.16% for the ACSI Leaders portfolio, while the S&P 500 had an annualized return of 10.97% over the same timeframe. The excess return provided from a portfolio of customer satisfaction leaders can easily be verified using publicly available ACSI data.
2021 was a year with many economic challenges, including inflation, supply problems and shortages. When demand exceeds supply, buyers lose power relative to sellers and their shopping/consumption satisfaction becomes secondary to availability/price in driving their product/brand/service choices. Given the above difficulties during the calendar year 2021, it stands to reason that although both the S&P 500 and Top ACSI firms experienced higher returns (28.71% and 24.18% respectively) vs their previous 16-year average, ACSI leaders did not outperform the S&P 500.
The stock-picking rules for the portfolio are straightforward: Select the leading ACSI companies in the most satisfaction sensitive industries, further weighted by the company’s relative score and elasticity.
It is interesting to note that while the ACSI Portfolio had a standard deviation of 16.71% vs the S&P 500 14.84% for the 2006-2021 period, Almost the entirety of that additional volatility comes in the form of a higher Upside Deviation (10.73% vs 8.67% respectively).
For more information on ACSI as a financial signal, please contact Josh Blechman.
There is a strong correlation between the aggregate national ACSI and aggregate corporate profit over time. This is not surprising and reflects the economic relevance of the ACSI measurement instrument. The flattening of both ACSI and profits began in 2013. The more recent downturn in customer satisfaction is worrisome. It is often the case that a change in customer satisfaction precedes a change in profitability. Since ACSI is down sharply, chances are that corporate profitability will follow suit. It doesn’t always happen, as was the case in the late 1990s, but the risk is high. Nevertheless, there are countervailing factors: Households now have the means to spend and there is pent-up demand caused by the COVID-19 restrictions. The short-term implications of a “shortage economy” with supply problems and lack of labor availability may also lead to a dampening impact of customer satisfaction.