Human face of share-price analysis

WHEN the world’s biggest asset manager, BlackRock, evaluates potential stock purchases, its managers look at all the usual financial metrics.

Some of them also consider something much harder to quantify: employee sentiment.

“We look for companies that have solid employee rankings and want to buy companies that have improvements in employee opinions,” said Paul Ebner, a portfolio manager and member of BlackRock’s scientific active equity group, a team of quantitative managers.

“Happy and engaged employees lead to more wins and more sales opportunities.”

That strategy is in line with a growing body of research findings suggesting that happy workers can be good for profits. But gauging employee satisfaction, and understanding how it might affect a company’s performance, can be tricky.

Two years ago, BlackRock, which has more than $4.65-trillion (almost R56-trillion) in assets, the company’s 77-member quantitative team began adding data from social media websites, including employee sentiment data, into its models for evaluating holdings and investment prospects.

Today, 20% of the data used by the group to analyse companies is “unstructured”, meaning it does not come as line items in analyst reports or regulatory filings. Ebner said employee sentiment was part of that.

He would not say exactly how his group gauges employee sentiment at companies it is interested in, but he did say BlackRock employed automated internet searches to look for key positive and negative words across a variety of blogs, social media, chat rooms and employee websites. The team was particularly interested in changes in employee sentiment that might indicate good or bad things happening at a company.

BlackRock is not the only company that looks at employee sentiment.

Ron Josey, an analyst at San Francisco-based JPM Securities, said he regularly checks to see what people are posting about the companies he covers on the job website Glassdoor.com, which allows its users to comment anonymously on employers and rate them on a scale of one to five.

For example, he said he noticed positive Glassdoor postings when Marissa Mayer took over as CEO of Yahoo!

Even the investors who use sites such as Glassdoor acknowledge they are imperfect tools for analysing stocks. There is no way of knowing, for example, whether the reviews posted on the site are representative of employee sentiment in general — or even if they were posted by actual employees. And sample sizes tend to be small.

Still, examples can be found on Glassdoor’s website of rising or falling sentiment that paralleled or came in advance of similar moves in stock price, according to an analysis of the site’s ratings and the relationship to share performance that was conducted for Reuters by Accern Corp, an analytics provider for institutional vestors.

At video-on-demand company Netflix, ratings rose over the past two years as its stock price rose 157%, according to Accern.

But there are also examples of companies where Glassdoor ratings soared in advance of stock price tumbles or comments became more negative even as a company was doing well or its shares were about to take off.

Whether or not employee sentiment should be factored into investment decisions, the research is intriguing some company trackers.

In 2011-12, human resources consultant Towers Watson surveyed 518 000 employees at 41 companies, and then looked at the 12 months of financial performance that followed.

Companies with engaged employees outperformed the average in their sectors at a much higher rate than companies with less-engaged employees.

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Alex Edmans, an associate professor of finance at University of Pennsylvania’s Wharton School of Business, found that companies that made Fortune Magazine’s list of the “100 Best Companies to Work for in America” outperformed their peers more than 2% a year from 1984 and 2009.

He acknowledged that many investors still did not consider employee sentiment as important: “The market has the oldschool view that the idea of happy workers is just fluffy.”

David James, a portfolio manager of the $4.1-billion James Balanced: Golden Rainbow Fund, is a sceptic.

A few years ago, his team tried to see if employee turnover was a reliable predictor of performance, on the theory that high turnover was an indicator of an unhappy workforce. But the team found no quantifiable effect.“We . . . have not looked at it further,” he said. —

He noticed positive postings when Marissa Mayer took over as CEO of Yahoo!