Young Research & Publishing Inc.

Investment Research Since 1978

Do the Best Managed Companies Make the Best Investments?

By

Image used under license from Shutterstock.com

The Wall Street Journal released the inaugural ranking of the 250 most effectively managed U.S. companies. The rankings are based on the work of the late business management guru, Peter Drucker. The rankings are based on a score of 37 specific metrics that fall under five dimensions of performance:

  1. customer satisfaction
  2. employee engagement and development
  3. innovation
  4. social responsibility and
  5. financial strength

Factors include everything from market-share and patent applications to employee ratings.

To qualify for the rankings, a company must be a member of the Fortune 500 or have stock that is a component of the S&P 500.

The five most effectively managed U.S. companies according to the Drucker Institute’s rankings are Amazon, Apple, Google, Johnson & Johnson, & IBM.

Is Effective Management Synonymous with Shareholder Return?

Investing in companies with good management never hurts, but do the best managed companies make the best investments?

Warren Buffett has useful advice on this topic. Buffett once said, “when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

Well managed companies can still make poor investments. Think of a commodity producer. It may be the best managed company in the world, but that management team will have no control over the price of the commodity it produces. If the price of the commodity being sold plummets, the stock price will likely follow suit. Or take a company like General Motors (the 40th best managed company on the list) that operates in an industry with far too much capacity. GM is likely to perform more in line with the economics of the industry than the effectiveness of the management team.

The other issue one might have with an investment based on management effectiveness rankings is valuation. Amazon may be the best managed company on the list, but doesn’t the stock’s triple digit earnings multiple already reflect investors’ faith in Jeff Bezos?

A New ETF

To test whether or not well managed companies do in fact make the best investments, the Drucker Institute is planning to launch an ETF based on its management rankings. The results will provide interesting insight into the role effective management plays in stock performance.

 

You can view the full list here.

The following two tabs change content below.
My Twitter profileMy LinkedIn profile

Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.