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What Insiders Can Tell You

By Andy Cross - Updated Nov 15, 2016 at 1:13AM

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Insider owners, just like you and me, invest their hard-earned cash for one primary goal: to make more money.

"When management owns stock, then rewarding the shareholders becomes a first priority, whereas when management simply collects a paycheck, then increasing salaries becomes a first priority."
-- Peter Lynch, One Up on Wall Street

Peter Lynch was certainly no dummy. During his 13-year tenure as manager of the Fidelity Magellan fund, he generated compound annual returns of nearly 30% -- staggering results when considering the size of his portfolio during those years.

One positive indicator Lynch looked for was insider ownership. This makes intuitive sense. Insider owners (1) have a great feel for the daily operations and prospects of a business and (2) are just like you and me in that they have invested their hard-earned money for one primary goal: to make more money. After all, I doubt they would have made the investment if they thought they would lose money.

Behind the boardroom doors
So I decided to take a look at inside ownership statistics for U.S. large caps that trade on our domestic exchanges and have market caps greater than $5 billion. On average, insiders at these companies own approximately 5% of outstanding shares (filtering out the outliers).

Of course, I want to find companies that are above average, because, well, I'm operating under the hypothesis that more is better when it comes to insider ownership. Using data from Capital IQ, I screened for companies with inside ownerships greater than 5%. This narrowed my search down to a little more than 100 U.S. companies.

Here's what's interesting: Of these companies, the average amount of insider ownership is slightly less than 20%. Moreover, since 2002, this group has delivered compound annual returns to shareholders of more than 13%, absolutely smashing the general market.

Like Peter said, high inside ownership leads to a shareholder-first mentality. I think that's a philosophy any investor can support.

Just take a look at the top six performers from this group over the past five years.

Market Cap (billions)

Insider Ownership

CAGR*

Arcelor Mittal

$63.7

44.8%

93.6%

Akamai Technologies (NASDAQ:AKAM)

$8.5

6.8%

68.1%

Research In Motion (NASDAQ:RIMM)

$23.2

15.4%

59.1%

Chesapeake Energy (NYSE:CHK)

$13.6

9.1%

39.6%

Garmin (NASDAQ:GRMN)

$10.7

42.8%

39.6%

Nordstrom (NYSE:JWN)

$13.8

20.0%

34.9%

*Compound annual growth rate. Data from Capital IQ, a division of Standard & Poor's, as of Jan. 29, 2007.

What this means
I routinely look for companies, whether large or small, having above-average inside ownerships. I especially like to see when the founders are still involved in the company and own lots of shares, like at Dell (NASDAQ:DELL) and Fastenal (NASDAQ:FAST).

Looking at companies that carry market caps greater than $5 billion today and have inside ownership of at least 20%, I see a few others that interest me. Amazon.com is an Internet titan whose founder leads the board, and that was one reason David Gardner recommended it to Stock Advisor subscribers in October 2002. Nike is known around the world as the brand par excellence for sports performance.

We do this kind of research almost every day over at Stock Advisor, where David and Tom Gardner's holdings have an average insider ownership stake of 13%. It's one metric they use to pick companies, and it's part of a methodology that has worked well. Over the past five years, their picks have delivered average returns of 68% versus gains of just 29% for the S&P 500. If you're looking for some additional stock recommendations and research tips, click here to grab a free 30-day trial. There's no obligation to subscribe.

Andy Cross hasn't yet founded anything, not even those socks he lost the other day. He owns shares of Dell. Dell, Amazon.com, and Garmin are Stock Advisor recommendations. Chesapeake Energy and Dell are Inside Value picks. Mittal is a former Inside Value pick. Akamai Technologies is a Rule Breakers pick. The Fool has a disclosure policy.

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Stocks Mentioned

Dell Technologies Inc. Stock Quote
Dell Technologies Inc.
DELL.DL
BlackBerry Stock Quote
BlackBerry
BB
$6.90 (2.22%) $0.15
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Akamai Technologies, Inc. Stock Quote
Akamai Technologies, Inc.
AKAM
$96.38 (0.10%) $0.10
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
JWN
$23.80 (1.23%) $0.29
Garmin Ltd. Stock Quote
Garmin Ltd.
GRMN
$98.55 (0.97%) $0.95
Fastenal Company Stock Quote
Fastenal Company
FAST
$53.67 (1.36%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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