Investors know the power of following the numbers or the charts instead of letting their emotions get the best of them. And so-called “data-driven” decisions almost always are better for your portfolio better than those based solely on gut feel. Thus it stands to reason that those data-driven corporate deciders could be good investment candidates. Just as investors can profit by tuning out emotions and concentrating on the facts, publicly traded companies can do the same thing with their strategy. Four to take note of are Assurant (NYSE: AIZ), Aetna (NYSE: AET), Best Buy (NYSE: BBY) and Coca Cola (NYSE: KO).
Having taught Strategic Decision Making to Babson College undergraduates for the last six years, I am familiar with how rare it is for companies to make data-driven decisions. But the benefits are very real. According to a paper from a trio of researchers including Erik Brynjolfsson of MIT, the few companies that actually make data-driven decisions are between 5% and 6% more productive than their peers.
Why do data-driven decision-makers outperform their peers? I’d guess that the data keeps them from making bad bets that their more intuitive peers would jump into feet first. In my consulting work, I have often found that gathering data about a potential market opportunity yields insights that turn what looked like a money-making opportunity into a pit of quicksand. Such data helps companies avoid money-losing investments.
Though it isn’t exactly common to find companies that make data-driven decisions, it is not difficult either. After all, International Business Machines (NYSE: IBM) expects by 2015 to generate $16 billion in revenues selling analytical software that companies use to make such decisions and regularly publishes a list of its top buyers. And on top of htat, several publicly-traded companies more than happy to brag about their use of analytical software as a selling point to prospective investors.
It’s not just corporate mumbo jumbo when these stocks play up their analytic nature. Here are four picks –
and each of them is worth considering as an investment.
- Assurant (NYSE: AIZ) and its Assurant Solutions unit uses it to improve the way it assigns customer service staff to in-calling customers
- Aetna (NYSE: AET) uses it to analyze trends in medical costs — with an eye towards reducing them
- Coca Cola (NYSE: KO) uses it to reduce waste in its system for distributing soft drink cartridges to customers
- Best Buy (NYSE: BBY) uses it to segment its customers, tailor marketing to each segment, and increase the repurchase rate of the customers in key segments
A company’s use of analytics to make decisions does not automatically mean it’s a great investment. But it does suggest that its management brings considerable intellectual horsepower to its decision-making which the MIT researchers argue will boost their productivity above that of their peers.
For now, however, the evidence is thin that these companies have already achieved -market-moving superior performance as a result of their data-driven decision-making — especially since these companies are at an early stage in their use of analytics software.
To me, it makes sense to screen these four companies based on the Price/Earnings to Growth (PEG) ratio — a stock’s Price/Earnings ratio divided by the company’s earnings growth rate — to measure whether a stock is cheap or expensive compared to its earnings growth. I think a PEG of 1.0 is fair value — less than that and you have something of a bargain.
Using the PEG ratio, here’s my ranking of the four data-driven decision-making companies:
- Aetna 0.75. Its P/E is 9.3 and Aetna’s earnings are expected to grow 12.4% to $4.22 in 2012
- Coca Cola 1.26. Its P/E is 13.4 and Coke’s earnings are seen to rise 10.6% to $4.28 in 2012
- Assurant 1.57. Its P/E is 15.2 and Assurant’s earnings are predicted to increase 9.7% to $5.39 in 2012
- Best Buy 1.80. Its P/E is 8.8 and Best Buy’s earnings are forecast to inch up 4.9% to $3.64 in 2012
In short, Aetna and Coca Cola are relatively inexpensive ways to play the boost in productivity that results from data-driven corporate decision-making.
Peter Cohan has no financial interest in the securities mentioned.