Why This Stock Is a Winner

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 -- on the level of 25-baggers that turn $5,000 into $125,000. Of the three he mentions, 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:

  1. You are a stockholder, with a good deal of your wealth riding on this company's performance.
  2. Founders and managers with high levels of ownership also have their wealth riding on the company's performance.
  3. They are doing everything they can to increase the long-term value of their stock -- of your stock.

Having a wonderful time ... 
You can be fairly sure that with their reputations, livelihoods, and careers on the line, 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's the opposite of that? Businesses where management has very little tied up in company stock, or where actions may be motivated by things that actually harm the stock's performance, such as office politics, power plays, or a tendency to work more with an eye on the clock (is it 5:00 yet?) than on improving the business model. Or, even worse, businesses where management rewards itself with high salaries and bonuses that have nothing to do with outstanding performance.

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 I 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 year -- a potentially winning combination.

Company

Insider Ownership

Sales Growth*

EPS Growth*

Net Margin*

ROE*

Baidu (Nasdaq: BIDU  )

23%

65%

104 %

107%

42%

Yongye International (Nasdaq: YONG  )

24%

116%

NM

24%

38%

ShengdaTech (Nasdaq: SDTH  )

48%

247%

139%

21%

15%

China Biologic Products (Nasdaq: CBPO  )

59%

50%

245%

24%

46%

Harbin Electric (Nasdaq: HRBN  )

34%

184 %

NM

19%

23%

Align Technology (Nasdaq: ALGN  )

13%

27%

186%

20%

25%

VanceInfo Technologies (NYSE: VIT  )

19%

45%

35%

14%

16%

Source: Capital IQ, a division of Standard & Poor's. *Trailing 12 months. NM=Not meaningful.

And beyond
Insider ownership, especially in smaller companies, is one positive indicator in the quest for tomorrow's multibaggers. There are many more, of course, but this is one of the core variables we look for at Million Dollar Portfolio. In fact, it's part of our famous OATS system for evaluating management.

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This article was originally published Feb. 21, 2006. It has been updated.

After years of exhaustive research, Rex Moore has determined that a stitch in time actually saves only 8.9997. At the time of publication, he owned no companies mentioned in this article. Baidu is a Motley Fool Rule Breakers choice. Yongye International is a Motley Fool Global Gains selection. The Fool owns shares of Yongye International. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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