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Ethical Investing, Lesson 3: Good Company, Bad Company

|Includes:HTZ, Southwest Airlines Co. (LUV)

The "boss from hell" stereotype exists for a reason - it has a strong basis in reality. Henry Ford's workers were spied on in their own homes, and Leona Helmsley once fired one of her husband's employees for taking an apple from the kitchen while working through lunch. 


Supervisors, managers, and top executives may have the power to hire, promote, and fire, but employees form the backbone of any company. Mistreating them is not only wrong, it can ultimately harm the business itself. Exploited employees are not motivated to do their best work, and are very likely to leave as soon as they find a job somewhere else. Wronged workers might sue a business for discrimination, wrongful termination, overtime wages owed, or sexual harassment. Not only does this affect the bottom line, the negative publicity can spur consumers to spend their money with a competitor in the future. 


The ethical investor's best move is to avoid such companies in the first place.


One place to start is Fortune magazine's annual "100 Best Companies to Work For" list. It's a diverse list representing a wide variety of employers - this year's top companies include DreamWorks Animation and the Mayo Clinic. However, less than half the companies on the current list are publicly traded.


Another resource for screening out ruthless companies is Glass Door offers a place for employees to anonymously post their employers' salaries, reviews, and interviews. Users don't mince words - if they were forced to work 60 hours per week and called in at 2 a.m., they will say so. If a company has good benefits but is plagued by communication issues, it will be in a review.


One company that receives high marks from employees is Southwest Airlines (NYSE: LUV). While there are a few disgruntled reviewers in the mix, Southwest employees generally praise the company's leadership, communication, benefits, pay levels, and job security. Southwest offers very inexpensive airfare and generally good service with no additional fees. It's in a great position to benefit from travelers' slashed budgets and impatience with other airlines for some time to come. Southwest, unlike its competitors, has stayed profitable for decades, and is now the country's largest domestic carrier.


Southwest has $3.7 billion in cash to $4.2 billion in debt - more debt than I prefer, but with EBITDA at $1.5 billion, I think they can handle it. Forward P/E is decent at 11.4, and the stock is currently a low $8.85, and EV/EBITDA is a very favorable 4.8. While I would not call Southwest stock a potential cash cow, I do believe it is worth holding onto for the long run.


Contrast that with Hertz Global Holdings (NYSE: HTZ). This car rental agency receives mediocre reviews from its employees, who consistently complain of 50-to-60 hour work weeks, low pay, poor communication from management, being unable to take breaks due to frequent understaffing, routine overbooking of cars, and high turnover.


Poor communication can ruin any company, and high turnover means more money spent on recruiting and training new employees on a regular basis. Disrespect towards employees isn't Hertz's only problem. The company has a whopping $11.7 billion in debt and a low $750 million in cash. With EBITDA at only $1.1 billion, Hertz simply has too much debt. Hertz's largest customer, the US government, is poised to severely curtail its travel budget, and top competitor Enterprise could go public at any time. The combination of bad employment practices and poor financials make investing in Hertz a non-starter (unless you want to short the stock).


Southwest Airlines treats its employees and customers right, and will likely continue to reap the rewards.

Stocks: LUV, HTZ