MCBASSI & COMPANY

Do our Good Company ratings predict stock performance?

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Yes.

The grade that a company earned on the Good Company Index™ is a powerful predictor of subsequent stock performance.  We examined this question this summer, one year after we assigned company grades, to see how companies had fared in the market over the 12 month period that had followed.

To ensure that we were comparing only similar companies to one another, we looked at all “industry-matched pairs” (pairs of companies in the same industry) in the Fortune 100.  We found twelve pairs in which the companies’ Good Company grades differed by one or more grade levels (for example, a grade of B versus a grade of C).

Across those twelve pairs, the stock price of the company with the higher grade outperformed that of its competitor with the lower grade by an average of 19.8 percentage points in the subsequent 12-month period.

For example, in June 2010 (when we finalized companies’ grades), Walgreen and CVS Caremark’s Good Company grades were a B- and D, respectively.  In the 12 months following the assignment of those grades (June 2010 to June 2011), Walgreen’s stock price outpaced that of CVS by 30.7 percentage points.

Another example is Chevron and ExxonMobil: in June 2010, the companies’ grades were C+ and F, respectively.  Between June 2010 and June 2011, Chevron’s stock return was 6.0 percentage points higher than that of ExxonMobil.

These are exciting findings for us.  One of the main themes of our book is an exploration of the direction the world will be moving in the future, but this represents evidence that being a good company is already paying off.

This post originally appeared on the Good Company blog earlier this week.