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 (and his team actively screens for in Motley Fool Hidden Gems), one characteristic is most important to me: a high level of insider ownership.
Why it matters
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 that 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.
What is the opposite of that? Businesses in which management has very little tied up in company stock ... in which 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 quittin' time 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, don't be chagrined if you find that some of your larger holdings have a low percentage of insider ownership. For example, AT&T (NYSE: T) is only 0.05% insider-owned. Visa (NYSE: V) sports a 0.09% level of insider ownership. Their size makes it awfully tough for anyone to own a significant share of the entire business.
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 I went a bit beyond that. The following businesses also have strong sales and earnings growth, high margins, and high returns on equity -- a potentially winning combination.
Company
Insider
Ownership
Sales
Growth*
EPS
Growth*
Net
Margin*
ROE*
First Solar (Nasdaq: FSLR)
23%
132%
125%
32%
33%
Apollo Group (Nasdaq: APOL)
14%
23%
120%
20%
91%
Diana Shipping (NYSE: DSX)
18% Continued... |