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," 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 are actively screened
for at
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 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 where 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,
Philip Morris (NYSE: PM) is only 0.2% owned
by insiders, while drug giant
Pfizer (NYSE: PFE) only counts 0.08%
ownership. Their sheer size makes it awfully tough for anyone
to own a significant share of the entire business -- though
as you'll see below,
somelarge companies do maintain large insider
stakes.
But smaller companies overall 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 companies with high insider
ownership, but went a bit beyond that. The following
businesses also have high margins and returns on equity, and
have been able to generate sales and earnings growth over the
past (very tough) year -- a potentially winning
combination.
Company
Insider Ownership
Sales Growth*
EPS Growth*
Net Margin*
ROE*
priceline (Nasdaq: PCLN)
6%
22%
13 %
11%
29%
Marvel (NYSE: MVL)
18%
43%
21%
26%
51%
China Green Agriculture (AMEX:
CGA)
45%
56%
48%
41% Continued... |