If you could wave a magic wand and bestow just
onecharacteristic 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," where 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 which are actively
screened for in
Motley Fool Hidden Gems), 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:
yourstock.
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. Where
actions may be motivated by things that actually
harmthe 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, don't be chagrined if you find that some of your
larger holdings have a low percentage of insider ownership.
For example,
Cisco Systems (Nasdaq: CSCO) is only 0.12%
owned by insiders.
Altria (NYSE: MO) sports 0.23% insider
ownership. Their sheer 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*
ClickSoftware Technologies
(Nasdaq: CKSW)
22%
33%
712%
23%
52%
RINO International
(Nasdaq: RINO)
71%
83%
130%
21%
51%
MercadoLibre
(Nasdaq: MELI)
15%
30%
133%
18% Continued... |