If Motley Fool co-founder and CEO Tom Gardner could only use one factor to choose investments for the rest of his life, he knows what he'd pick. "I wouldn't look for growth," Tom says. "I wouldn't look for a great balance sheet. I'd focus only on insider ownership."
Really? Tom would give up the security blanket that is the balance sheet for something as seemingly unimportant as insider ownership? Preposterous! Absurd!
And completely brilliant.
When you think about it, CEOs and company insiders have the best view of their company. They know the challenges it faces, and the potential it holds. If insiders think their company will keep bringing in great returns, why wouldn't they invest in it? Conversely, if insiders know that things are looking dire, they'll be more likely to sell.
Need an example? Quality Systems (Nasdaq: QSII ) has richly and repeatedly rewarded investors since going public in 1995. Its single largest shareholder: founder Sheldon Razin, whose holdings equal 17% of the company. That stock gives Razin a huge stake in his company's continued success -- and instead of selling his shares, Razin consistently holds onto them. Clearly, he has faith in his company's future.
ATP Oil & Gas (Nasdaq: ATPG ) founder and CEO Paul Bulmahn owns 12% of his company's shares, making him the largest direct holder. Once again, that sizable stake demonstrates his confidence in his company, and gives Buhlman a vested interest in its continued growth.
The same goes for Dell's (Nasdaq: DELL ) founder and CEO, Michael Dell. He owns more than 14% of Dell's outstanding shares, more than any other single shareholder. Additionally, he has continued to purchase shares consistently at a high rate over the past year.
If a company's insider ownership can help determine its strength, it can also reveal a company's weakness. Consider Travelzoo (Nasdaq: TZOO ) CEO Christopher Loughlin. With no reported holdings whatsoever as of May 3, Loughlin's lack of insider ownership doesn't exactly inspire confidence.
The value of insider buys and sells
Although there's no surefire way to know how a company will do in the future, insider buying and selling can represent strong indicators. If you see CEOs selling large portions of their shares, you may want to steer clear. Likewise, CEOs who buy shares provide a pretty good sign that they believes their company will do well in the future. That's no guarantee of success, but it sure beats a company in which insiders lack the confidence to put their money where their mouths are.
What do you think? Want to keep up with any of the companies mentioned above? Click on their links to add them to your watchlist.