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 -- like 25-baggers that turn $5,000 into $125,000. Of the three he mentions (and actively screens for in Motley Fool Hidden Gems), one characteristic is most important to me: a high level of insider ownership.

Why it matters
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 -- which also happens to be your stock.

Having a wonderful time ...
With their reputations, their livelihoods, and their careers on the line, you can be fairly sure that 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 in which management has very little tied up in company stock ... in which actions may be motivated by things that actually harm the stock's performance, like office politics, power plays, or working more with an eye on the clock (is it quittin' time yet?) than on improving the business model. Or, even worse, management that rewards itself with high salaries and bonuses that have nothing to do with outstanding performance.

Now, don't be chagrined if you find that some of your larger holdings have a low percentage of insider ownership. For example, AT&T (NYSE: T  ) is only 0.07% insider-owned. Visa (NYSE: V  ) sports virtually zero insider ownership. Their size makes it awfully tough for anyone to own a significant share of the entire business.

But smaller companies 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 some companies with high insider ownership, but I went a bit beyond that. The following businesses also have strong sales and earnings growth, high margins, and high returns on equity -- a potentially winning combination.

Company

Insider
Ownership

Sales
Growth*

EPS
Growth*

Net
Margin*

ROE*

Cal-Maine Foods (Nasdaq: CALM  )

33%

53%

631%

16%

69%

Lululemon Athletica (Nasdaq: LULU  )

38%

86%

638%

12%

43%

BMB Munai (AMEX: KAZ  )

21%

281%

NM**

53%

22%

VASCO Data Security (Nasdaq: VDSI  )

25%

38%

26%

17%

32%

Arena Resources (NYSE: ARD  )

14%

95%

63%

37%

23%

*Trailing 12 months. Data provided by Capital IQ, a division of Standard & Poor's. **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 insider ownership is one of the core variables we screen for in Hidden Gems.

The process is working. Tom and his analysts are averaging 13% total returns for their recommendations, versus a 1% loss for identical amounts invested in the S&P 500. We invite you to take a free trial and look through all of our active recommendations. There's no obligation to subscribe.

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

Fool analyst Rex Moore yearns for the return of Green Acres. At time of publication, he owned shares of VASCO Data Security, which is a Motley Fool Stock Advisor pick. The Fool is investors helping investors.


Read/Post Comments (8) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2008, at 11:43 AM, jdubrox wrote:

    The title of your article is, "Why This Stock Is a Winner."

    Which stock is your article about? As far as I can tell, this article is about many stocks, and your admiration for "Tom."

    I, like many readers, don't appreciate the misleading title that made us think we'd get a good stock pick here.

  • Report this Comment On July 22, 2008, at 9:52 AM, SteveTheInvestor wrote:

    I agree with jdubrox. The article should match the headline. Quit trying to suck people into reading a Stock Advisor sales pitch.

    I don't know which "winning" stock you are talking about in the article. However, it can't be Vasco. I bought this Stock Advisor gem and am down over 40%. So, to which of the other 4 are you referring?

    Throw us a bone every once in a while.

  • Report this Comment On July 22, 2008, at 12:25 PM, teletuna wrote:

    Here here! I am tired of these systematic, templated articles that are simply advertisements for MF. I have no problem with you touting the benefits of MF to grow your subscription base but at least include more substance in the story and a headline to match. It never used to be like this. If it continues interest in MF along with subscriptions will diminish. The explanation as to "Why this stock is a winner" remains a mystery. I agree that it certainly isn't VASCO but hope that it will be soon.

  • Report this Comment On July 25, 2008, at 3:19 PM, Boo2007 wrote:

    Только благодарить Вас за беспокойство могу.

  • Report this Comment On July 25, 2008, at 5:59 PM, GreenbackCafe wrote:

    Hah. 9 recommendations.

    Too bad there's no way to bury Fool articles --- I don't usually read any of these articles because, as teletuna said, they are "simply systematic templated advertisements for MF." All these thinly veiled ads need to called for what they are and buried.

    Bury, bury, bury this article. I'm really wondering who actually recommended it. If it's Fool insiders, shame on you guys for trying to game the system. Anyone else, did you _really_ read this or are you just knee-jerking it?

    I suppose I'll wait another couple of months before clicking another MF article. What an unfortunate waste of bandwidth the fool has become.

  • Report this Comment On July 25, 2008, at 7:34 PM, mms111 wrote:

    I could not agree more. When I first subscribed to MF- it was a much different publication. Now---- each one is just a pitch for another newsletter to subscribe to. I will NOT be renewing unless your style changes.

  • Report this Comment On July 26, 2008, at 12:25 AM, SueMParks wrote:

    I totally agree with the other people so far. I read not all of your emails, since I don't have time to read all my email, however, lately wanting expert info on the economic situation/stock market is needed, and if you have the expertise, that is promoted, then be specific, not round about, and try to to sell other products to make money yourself!

  • Report this Comment On August 10, 2008, at 9:46 AM, esch001 wrote:

    I agree completely with all these negative comments. About the recommendations: I expected to find positive comments there (really foolish) and clicked - to see that 13 recommendations became 14. Now we know how recommendations of such stupid pages are created: by mistake

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