These 5 Managers Eat Their Own Cooking

I don't know about you, but my mother always made me the guinea pig when it came to taste-testing her food for dinner parties.

I didn't mind helping my mother out. But when it comes to investing, it's smart to pick out companies whose leaders are willing to eat alongside me, as it were, by owning a big equity stake in the company. And I'm not talking about options, either. Managers who own real shares, right now, are more likely to have strong incentives to ensure the company remains on solid financial footing and maintains a proper strategic focus

After all, some of the best companies in the world have historically exhibited high levels of insider ownership and strong, visionary leadership: Some of the more conspicuous successes include legends like Microsoft (NASDAQ:MSFT) and Berkshire Hathaway (NYSE:BRK-A).

Actions speak louder than words
A CEO or CFO buying up shares clearly believes in the future of the company. (On the flip side, while selling is sometimes a negative signal, it could simply mean that the executives need a few quid for personal expenses.)

What's especially interesting about corporate insider buying presently is that insiders are the most bullish they've been since 1975, according to Liz Ann Sonders, chief investment strategist for Charles Schwab. Insiders are buying their company's stock at a pace "rarely seen in the past 40 years," Sonders said, indicating that some of the most in-the-know people believe their companies are undervalued.

To identify potentially rewarding stocks with huge insider stakes, I used the Motley Fool's CAPS screening tool to search for companies with:

• Insider ownership stake of 20% or greater
• Minimum market cap of $500 million
• CAPS rating of five stars, the highest from our CAPS community. During the first 20 months for which we have data, four- and five-star rated companies outperformed the market, with average annualized gains of 12%.

Voila! Here are some of the companies that popped out when I ran the screen today:

Sources: Capital IQ, a division of Standard & Poor's, and Motley Fool CAPS.

While sizeable inside ownership is an indicator that the company you're invested in is in good hands, it should only be one of the criteria you use to screen for winning stocks. Remain mindful of the stock's valuation, fundamentals, and growth prospects. And in this economic environment, pay special attention to the sectors in which the stock you're considering operates. Even managers who run their companies with the best of intentions can get bulldozed by macroeconomic forces.

If you're interested in seeing some other tasty stocks, check out Motley Fool CAPS today! Let the collective wisdom of our 125,000 member-strong investment community help you make better investing decisions.

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