Insider Ownership: An Important Piece of the Puzzle
A few years ago, we explained that the only way to achieve serious gains in your portfolio is to invest in small and ignored companies. We showed that nine out of ten of the top performing stocks from 1998 to 2007 were Micro Cap stocks (worth less than $250 million dollars) and essentially ignored by Wall Street. The first question on our Top 3 questions to ask about every stock is: Does this company have room to grow?
The fact is, if you’re looking to do really well in the stock market, you have to focus on small, ignored companies. If you just want to protect your wealth, invest in ETFs or put your money in gold. Bear in mind, however, that 95% of public-company bankruptcies were small and micro cap stocks as well. Just because a company is small doesn’t mean it’s going to get big, and it’s not an easy task to find the quality stocks among all those potential failures. You have to do your due diligence by looking into the economics of the company: does it have a low-debt, cash-rich balance sheet? Does it have a steady free cash flow and increasing profits every year? Does it pay dividends?
Also remember, on average, companies with high and increasing consumer satisfaction rates do better than the S&P 500. So once you’ve found a small company with good financials, and a product or service you understand, look into their customer satisfaction statistics. Are they high? Have they been increasing year over year? If yes, then move on to what I consider to be one of the most important and telling metrics about a company: Insider ownership.
Check this, common sense investors, the last piece of the puzzle…
Top Ten Performing Companies of the 2000s:
Medifast: 16,209%
Green Mountain Coffee Roasters: 9,211%
Hansen Natural: 7,024%
Bally Technologies: 5,975%
XTO Energy: 5,917%
Southwestern Energy: 5,776%
Clean Harbors: 4,669%
Amedisys: 4,613%
Contango Oil & Gas: 4,601%
Deckers Outdoor: 3,775%
CEO’s ownership stake in those top performers:
Medifast: 13%
Green Mountain Coffee Roasters: 51.1%
Hansen Natural: 39.1%
Bally Technologies: 1.7%
XTO Energy: 3.2%
Southwest Energy: 1.7%
Clean Harbors: 39%
Amedisys: 10.2%
Contango Oil & Gas: 10.9%
Deckers Outdoor: 36.7%
The average CEO ownership percentage for companies that went bankrupt in the 2000′s was about 5%, where the average CEO ownership percentage for the top ten performing companies during that same time was about 20%. Bear in mind this is just the CEO’s ownership percentage. Google Finance has information about all of the major insiders of a company and their levels of ownership. When a company has a management team with a high level of insider ownership, it shows that the people running the business have a tangible investment in the company’s future and they believe in what they’re doing.
But just like not every small cap company is destined to get huge, not every company with high levels of insider ownership will be successful either. It’s a powerful piece of information, one of the most important in my opinion… but its still just one piece. It’s only useful when combined with the rest of the puzzle. It’s just common sense.
