If you could wave a magic wand and bestow just one characteristic on all of your investments, what would it be? (Besides the ability to print money, that is.)
I began thinking about this after reading Tom Gardner's "A 25-Bagger in Five Years," in which he identified three things that give a company the chance to achieve outsized gains over the years -- like 25-baggers that turn $5,000 into $125,000. Of the three he mentions, one characteristic is most important to me: a high level of insider ownership.
Why it matters
But this makes sense, right? Think about any of your major personal investments:
your stock.Having a wonderful time ...
With their reputations, their livelihoods, and their careers on the line, you can be fairly sure these managers and board members are motivated to do what's best for the company. It's like having someone on the inside, working for you. Every day. A great example is Amazon.com (Nasdaq: AMZN) CEO Jeff Bezos, who owns over 22% of the $24 billion e-tailer!
What is the opposite of that? Businesses where management has very little tied up in company stock. Where actions may be motivated by things that actually harm the stock's performance, like office politics, power plays, or working more with an eye on the clock (is it 5:00 yet?) than on improving the business model. Or, even worse, management that rewards itself with high salaries and bonuses that have nothing to do with outstanding performance.
Now, most of your larger holdings will have a low percentage of insider ownership. For example, Citigroup (NYSE: C) is only 0.4% owned by insiders. JPMorgan Chase (NYSE: JPM) sports just 0.5% insider ownership. The sheer size of those companies makes it awfully tough for anyone to own a significant share of the entire business -- though perhaps a different culture would have evolved in some of the large financial firms if management had held a greater stake in the future.
But smaller companies are a much different story. In small-cap land, CEOs and managers with high levels of ownership are much more likely to rise above the mediocrity and work toward the common goal of great stock performance.
For instance
I ran a screen for some companies with high insider ownership, but went a bit beyond that. The following businesses also have positive sales and earnings growth, high margins, and high returns on equity (ROE) -- a potentially winning combination. I also included some larger companies that nonetheless have high levels of insider ownership.
Company
Insider
Ownership
Net
Margin*
ROE*
TeleCommunication Systems (Nasdaq: TSYS)
19%
23%
67%
Star Bulk Carriers (Nasdaq: SBLK)
20%
56%
29%
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