Firms Of Endearment: Wall Street’s Next Hot Strategy (the "Stakeholder Strategy") Is Up 205%

by Mark Skousen

Firms Of Endearment: Wall Street’s Next Hot Strategy (the “Stakeholder Strategy”) Is Up 205%

by Mark Skousen, Chairman, Investment U

Thursday, May 11, 2006: Issue #533

The world’s greatest hockey player, Wayne Gretzky, once described his success this way: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

We here at Investment U take the same attitude with fads on Wall Street. Over the years, I’ve witnessed huge amounts of money being made following a hot strategy, whether it be the Nifty Fifty in the late 1960s, or the Dogs of the Dow in the 1990s. But these techniques work only for a few years, and then fall out of favor when the crowd jumps in.

The key is to invest in a strategy that is only beginning to catch on - at the beginning of a fad, not the end.

What’s the newest method of stock selection?The buzz among insiders is to buy companies with a new management style called “The stakeholder’s strategy.

” Let’s take a look at this new management fad, then review the new book, Firms of Endearment.

Who’s “In” the Stakeholder’s Strategy?

“In” are CEOs who have superb people skills, maintain the highest ethical standards, and build a strong team around them.

Rather than being feared, these leaders inspire loyalty, and even affection. They live up to an Adam Smith-style harmony-of-interest model rather than the Marxist conflict-of-interest model. They seek to increase the value to all “stakeholders” in a company - not just fulfilling the needs of executives and stockholders, but customers, employees, suppliers and the community. Under the “stakeholder” model, everyone wins.

Who’s “Out” of the Stakeholder’s Strategy?

“Out” are autocratic managers who are paranoid and unwilling to share power. Sooner or later, they suffer from failed strategies, lawsuits and missed earnings - inevitably, they see their stock prices decline, and a dismissal.

We can think of many examples recently, including Disney’s Michael Eisner, Hewlett-Packard’s Carly Fiorina, and Sun Microsystems’ Scott McNealy.

‘Firms of Endearment’: Aquarian CEOs Return Superior Returns

This summer, a new book - written by three management specialists - identifies 35 companies they call Firms of Endearment, the title of their book. These are companies that treat their employees well and inspire them to be innovative, respond readily to consumer needs and complaints, show interest in their community and maintain high moral standards.

Among the best companies identified in Firms of Endearment are:

  • Starbucks
  • Best Buy
  • Toyota
  • Costco
  • Southwest Airlines

Whole Foods Market (Nasdaq: WFMI) is also on the book’s list. And there are plenty of reasons

Team Players In Every “Isle” And 5% Off the Top

I am especially familiar with Whole Foods, having developed a friendship with founder and CEO John Mackey.

John is a management genius, and in 20 short years, his company is now the 5th-largest grocery store chain the United States. I don’t say that just because John loves my economics books. He is very unorthodox in his “decentralized” business model.

His company is very egalitarian and democratic, while providing the incentives to encourage employees and executives to succeed. His employees are empowered and rewarded for providing the best new products to customers. Having interviewed several top execs at Whole Foods, I know that John has surrounded himself with devoted “team players” that will continue to grow this booming company. Whole Foods stores are always jammed with customers because they have the right stuff, even if it costs a little more.

In the October issue of Reason magazine, John Mackey’s stakeholder model came under criticism by free-market economist Milton Friedman and T.J. Rodgers, libertarian CEO of Cypress Semiconductor(NYSE: CY), who criticize businesses for engaging in social responsibilities such as corporate funding of non-profit organizations. (Whole Foods gives 5% of its profits to selected charities each year, including a sizeable donation to Katrina victims.)

Interestingly, while Whole Foods stock has skyrocketed, Cypress Semiconductor has lost value for its shareholders.

Firms of Endearment: Whole Foods' Healthy Returns

Whole Foods is not the only “firm of endearment” that has done well for shareholders. The authors of the book found that these 35 top publicly traded companies returned 758% over 10 years, compared to 128% for the S&P 500. In the past five years, while the S&P 500 is just above water, these companies gained 205%.

But it’s only the beginning. I think they have a few more years to run before the public catches on and drives these stocks to new levels, as most companies play catch-up.

Good investing,


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