Phil Knight's story is the stuff of legend. In 1962, he co-founded Blue Ribbon Sports, because he thought he could make a better running shoe than anything else on the market at that time. A few years later, he would rechristen his company Nike (NYSE: NKE ) . Nearly a quarter-century after its founding, Knight took Nike public in August 1987, at a split- and dividend-adjusted price of $1.74. That day, Nike was valued at $450 million. Today, its market cap approaches $22 billion -- 50 times its original value.
Like any great success story, Nike's prodigious growth wasn't the result of a single event but rather the combination of favorable situations and circumstances, combined with management's ability to capitalize on them. If chance favors the prepared mind, it certainly does doubly so for the prepared company. Early signs of Nike's future success were the creation of strong branding through athlete endorsements (most notably Michael Jordan), consistent dividend payouts to shareholders, and large insider ownership of the company. Of these reasons, perhaps the most telling indicator of Nike's long-standing success was the high percentage of insider ownership, most notably Knight's retention of the overwhelming majority of his shares.
Insiders cashing in
Insider ownership is often a statement by members of management of their faith in the upcoming success of their product, the company. Obviously, the more stock that managers hold, the more they have personally vested in the company. That gives those running the company not only a large professional interest in the success of the company but a financial one as well.
When Nike went public, Phil Knight was the president of the company and owned the majority of shares. Knight remained as president and CEO of the company until 2004, when he stepped down but kept his role as chairman of the board. Today, Knight still holds a 23% stake in Nike, valued at approximately $5.2 billion. He also controls 92% of the voting shares. Truth be told, we're not big fans of dual-class share structures that one finds at places like Google (Nasdaq: GOOG ) , EZCorp (Nasdaq: EZPW ) , Nike, and others, as this article from Bill Mann explains.
That's not really the point here, though. With an estimated 70% of his net worth tied up in Nike's stock, combined with 40 years of dedication and experience running the company, Phil Knight clearly has the continued success and growth of Nike at the core of the decisions he makes. This is comforting for current and potential investors, because they know the actions taken by management are undoubtedly aligned with investor's interests.
The correlation between significant ownership of shares by insiders and large company growth is not only the case for Nike, but also for various other companies. The consistent growth in other apparel manufactures, such as Kenneth Cole (NYSE: KCP ) and Motley Fool Hidden Gems recommendation Columbia Sportswear (Nasdaq: COLM ) , can be attributed in part to the percentage of insider ownership of 43% and 63%, respectively. And like Phil Knight, management of these companies, importantly, tend to sell shares only rarely, if at all.
Insiders cashing out
For those still in doubt of the validity of the link between management's financial stake in a company and the company's value, take a look at DHB Industries (AMEX: DHB ) . After CEO David Brooks jettisoned roughly $110 million worth of company stock through the month of December 2004, the company's stock went from a Dec. 27 closing high of $22.55 to a low 10 months later of $2.80. If we assume that David Brooks is a rational human being, we could conclude that his actions forecast his belief that the company had struggles ahead. Otherwise, we doubt he would have sold so much stock over the course of a month.
The Foolish bottom line
Insider ownership and actions should be a core component of any investment. It's one of the most important attributes that Tom Gardner and Bill Mann look for in their small-cap stock newsletter, Motley Fool Hidden Gems. One of the most important things a small cap can have is a Phil Knight-like chieftain at the helm.
To view Tom and Bill's research and buy reports for free for 30 days, click here. Their recommendations are ahead of the market at large by 26 percentage points, and each month, two new small-cap ideas come your way. There is no obligation to subscribe.
Fool contributor Andrew Pattersonowns none of the companies mentioned in this article. The Fool has a disclosure policy.