Hedge funds use all types of information to “beat the market.” Some use satellite data of how many cars are parked in lots in front of department stores to predict sales figures. An empty lot bodes poorly for quarterly returns. Some look at satellite data of corn fields to predict commodity prices.
A recent draft paper looked at a more mundane source of what is known as serendipitous data – online reviews. The researcher Jiekun Huang at University Illinois at Champaign-Urbana looked at six million Amazon reviews from 2004 to 2015. He found a positive correlation between customers’ ratings and a company’s subsequent stock performance.
The paper found that stocks associated with higher-rated products in one month outperformed those with lower ratings by around 0.8 percentage point in the next month. Extrapolated over a yearly period, that’s 10 percentage points of annual benefit.
The question is whether the information contained in the reviews tracked information that was already baked I to the marketplace. Further, the study did not control for other items that affect performance, such as advertising and a company’s profit margins.
The paper concluded that a direct measure of a consumer’s perceived quality of products correlates with stock returns. It also noted that information embedded in consumer opinions is of significant value to the market. Finally, the paper noted that customer satisfaction if related to improved operating performance and higher firm valuation.
The financial health of an organization can be measured by profit and loss as well as cash flow. But, if a business has paying customers, measuring their feedback and sentiment can serve as a leading indicator for its financial health. You’d want to know the relative number of cars in the Home Depot parking lot before Home Depot releases its quarterly earnings.
We are fans of capturing point-of-service patient feedback. If you are doing a great job, you’ll receive a bucket of thank you notes every day. That’s uplifting. No less important, if this information is placed online, the effect will be amplified with an unparalleled marketing campaign. Conversely, if patients are not satisfied, you’ll be better equipped to identify what the problems are sooner rather than later. Most of the time the fixes are easy. But, a good diagnosis must take place before effective treatment is initiated. This is true in healthcare. This is true in business.
We live in interesting times.