Want to know where a company is headed? Who better to ask than the people running the company! This is one reason why insider ownership should be near the top of your checklist, and why it is Fool co-founder Tom Gardner's favorite metric. Below, find out why insider ownership matters, and check out a few stocks in which insiders are heavily invested.
It's all about incentives
If executives own plenty of shares, you can bet that their interests are aligned with those of the shareholders (because they are shareholders!). And not only does owning shares show faith in the company from those who know it best, it incentivizes management to increase shareholder value and work hard to make the business better.
When analyzing insider ownership, be careful to note that it's much easier for executives at small companies to own a higher percentage of the business. This is why when looking at a giant company with seemingly low insider ownership, you have to compare the number of shares executives own relative to their annual compensation. A good guide is for executives to own shares valued at three times what they make in a year. You can find both insider ownership and executive compensation in a company's proxy statement, filed with the SEC under the form name DEF 14A.
Now, here are a few stocks in which executives and directors are deeply invested.
Iron Mountain (NYSE: IRM )
The document management company that can drive a paper shredding truck right up to your office boasts executive and director ownership of 11%. Iron Mountain sat out the market's current rally, down over 7% so far for the year, while the company struggles to reorganize. Key to the reorganization is a focus on its "traditional physical storage" business and improving return on invested capital, which is why Iron Mountain sold off its digital division last June and is looking to drop its Italian division. In the next two years, the company expects to return $1 billion to shareholders through increased dividends and share buybacks.
Tempur-Pedic International (NYSE: TPX )
Recently, this stock has been as dreamy as the company's beds, jumping over 50% from the beginning of the year and no doubt making executives and directors, who own 4% of the business, very happy. And while 4% may seem low, CEO Mark Sarvary owns over $48 million in stock, while he only earned $3.4 million last year -- handily beating the ownership hurdle of three times his total compensation.
Tempur-Pedic has made itself comfortable atop the luxury mattress segment, helping it earn net profit margins of over 15% in 2011, compared to competitor Select Comfort's (Nasdaq: SCSS ) Sleep Number beds, which only drove a net profit margin of 8% in 2011. Tempur-Pedic recently launched a new line, TEMPUR-Simplicity, to capture the market for beds under $2,000 -- in the range of the classic Sleep Number beds.
Clean Harbors (NYSE: CLH )
Directors and executives at this environmental services and waste cleanup company own 11% of shares. The company grew revenue 15% in 2011 over 2010, with more shale and oil sands related work, and helping clean up the Yellowstone River oil spill. If environmental disasters continue, Clean Harbor stands to profit. The Yellowstone River work alone earned the company over $43 million, while costing ExxonMobil (NYSE: XOM ) , the owner of the pipeline, roughly $135 million (and the state of Montana settling for $1.6 million in penalties). And in 2010, Clean Harbors earned approximately $253 million from the oil spills in the Gulf of Mexico and Michigan. As energy companies expand production -- like Exxon, which plans to begin production on 21 new oil and gas projects in the next three years -- probability would lean toward more opportunities for Clean Harbors.
Don't wear blinders!
Even though insider ownership aligns management to shareholders, it should be considered alongside other measures of a business's health and prospects. Unfortunately, there's just no replacement for digging through the balance sheet and forecasting where an industry is headed.
For one stock that sports high insider ownership and solid financials while gobbling up a growing market, read our free report: "The Motley Fool's Top Stock for 2012."