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 his team 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 -- of 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 is 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 0.05% insider-owned. Visa (NYSE:V) sports a 0.09% level of 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*

First Solar (NASDAQ:FSLR)

23%

132%

125%

32%

33%

Apollo Group (NASDAQ:APOL)

14%

23%

120%

20%

91%

Diana Shipping (NYSE:DSX)

18%

39%

13%

63%

25%

Perfect World (NASDAQ:PWRD)

31%

72%

42%

45%

43%

Intrepid Potash (NYSE:IPI)

44%

81%

59%

34%

38%

*Trailing 12 months. Data provided by Capital IQ, a division of Standard & Poor's.

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. The Gems recommendations are beating the S&P 500 substantially. We invite you to take a free trial and look through all of the active recommendations -- which include the team's top six stocks to buy now. 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. He owns no companies mentioned in this article. First Solar is a Motley Fool Rule Breakers pick. The Fool is investors helping investors.