Barbara Gray, CFA – July 3, 2012 – As an Analyst, my passion is to come up with new ways for investors to look at and value companies. But in the end, all that really matters is the bottom line: does the investment thesis add value for investors (i.e. does it help them pick the winners and/or avoid the torpedoes?) As there are so many unforeseen and uncontrollable variables (both economic and company-specific) that can influence a company’s stock price performance, it is rare to be able to come up with an investment thesis that actually works in the real world.
Since it has been eighteen months since I published my paper “Social Media: An Exposing Disruptive Force – Look for Companies with “Heart” and “Soul” But Beware of “Empty Shells”, I decided to take a look at how my somewhat radical investment thesis played out. The paper laid the foundation for what would become my social capital investment thesis, as my basic premise was “as the power shifts from the company to the consumer, we believe customer relationships will be the new driver of firm value, with social media exposing the depth of a company’s customer relationships and accelerating the value creation/erosion process.” In the paper, I discussed how “the transparent nature of social media will peel away the layers of a company, exposing the true authenticity and depth of its customer relationships” and I came up with my shell, heart, and soul concept.
- Shell: Utility value proposition (financial and functional elements) that its product or service offers to customers.
- Heart: Emotional connection its customers have to the brand
- Soul: Strong psychological attachment its stakeholders have for the company’s greater purpose
Although it took me over six months to come up with the genesis of my investment thesis, it was pretty basic: “We believe the greatest investment opportunity will come from identifying companies with “heart and soul” that are ideally positioned to leverage their high level of brand enthusiasm and grassroots community marketing efforts through social media. We caution investors against the “empty shells” that are at risk of cracking as social media exposes the inauthenticity and shallowness of their relationships with customers, employees, and other stakeholders.”
In the paper, I proposed that social media was a “valuable new due diligence and screening tool for investors” and developed a social media analytical framework to assess the level and quality of a company’s customer relationships, which I illustrated through a case study on six consumer companies. Shown below is my classification list of the companies (in order of level of heart and soul) and their relative stock price performance over the past eighteen months (click on the chart to enlarge):
[image title=”BradyCap Alpha” align=”right” lightbox=”true” width=”300″ autoHeight=”true” linkTarget=”_top” quality=”100″]http://bradycap.com/wp-content/uploads/2012/06/Insights_BradyCap-Alpha.png[/image] lululemon (LULU) – Big Heart & Soul
Starbucks (SBUX) – Medium Heart & Big Soul
Coach (COH) – Big Heart & Little Soul
Tim Hortons (THI) – Little Heart & Little Soul
Tiffany & Co. (TIF) – Big Heart
[highlight type=”light”]Yellow Media (YLO) – Shell[/highlight]
I will leave it to you to make your own conclusion, but I believe this provides compelling evidence for my social capital investment thesis…
Social media is creating a new form of appreciating equity called social capital and we are now starting to see an explosion in growth of the number and sophistication of social analytics tools. As these new tools turn more and more qualitative data on companies (previously ignored by investors that just focused on the numbers) into quantitative data, I believe social capital will become even more of a predictive variable for determining stock price performance.
The bottom line: I believe social capital is emerging as the new alpha for investors.
What implications could my social capital investment thesis have for the stocks in your investment portfolio?
Disclaimer: I have a LONG position in lululemon athletica, inc. (LULU-NASDAQ), Starbucks Corporation (SBUX-NASDAQ), Coach, Inc. (COH-NYSE), and Tiffany & Co. (TIF-NYSE).