By Thompson Clark, Mauldin Economics
There are no shortcuts to investing.
Well, maybe a …
This “shortcut” is really just a simple strategy. But it can easily increase your returns by 6% or more each year. It may not seem like much. But when a $ 100,000 portfolio beats the market 6% for a decade in a row, that translates to $ 154,000 more in your pocket. And you don’t have to do much to get it.
- Just invest in companies where the insiders have a lot of weight in the game.
We all know that Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA) have handed out monstrous earnings to shareholders. They have climbed 342%, 416% and 2,135%, respectively, in the past 5 years alone.
And they all have one thing in common: strong insider ownership. Jeff Bezos still owns 14% of Amazon. Reed Hastings owns 1.8% of Netflix. And Elon Musk owns 23% of Tesla.
It’s no coincidence: stocks with strong insider ownership tend to do better than most. In fact, a study found that when insiders bought shares in their own companies, those shares outperformed the market by more than 6% per year.
- Tracking insiders is an easy way to come up with great investing ideas.
This means tracking their buying activity and the size of their holdings. The more skin insiders have in the game, the more determined they are to strengthen the long term profits of their business.
It makes sense when you think about it. After all, no one washes a rental car. But when you own something, whether it’s a billion dollar car, house, or business, you take better care of it.
This is not always the case with mercenaries who run public enterprises. It’s not that they don’t care. But they focus on short-term issues like “what’s the next quarter looking like?” “
Meanwhile, an insider with a large stake will focus on the long term. He will ask himself, “How can I increase the value of my investment for myself, my family and my investors?” These are the guys we like to invest with.
It is common for insiders, and founders in particular, to own large stakes in these companies.
Albert Namad, CEO and Chairman of Watsco (WSO), is a prime example. Watsco is the largest HVAC distributor in the United States. After Namad took a controlling interest in the company in 1973, it increased its annual sales from $ 5 million to $ 5. billion.
Along the way, Watsco’s shares went from $ 6 to $ 289. And Namad’s stake is now worth $ 440 million.
- Following insiders with high stakes is a reliable path to profit …
I have shared some of these opportunities with you here at Smart money monday. Opportunities like steelmaker Cleveland-Cliffs (CLF), where CEO Lourenco Goncalves owns around 1% of the company. Goncalves is a big reason I love Cleveland-Cliffs. Under his leadership, it acquired a near-monopoly hold over US production of iron ore and rolled steel.
Earlier this month, Cleveland-Cliffs agreed to buy a leading scrap metal company for $ 775 million. This is exactly the kind of smart deal I would expect from an insider like GonÃ§alves, who has a lot of skin in the game. I own shares of Cleveland-Cliffs, and they are still to be bought at current prices.
- The strong insider ownership is also a big reason why I am following Latham Group (SWIM).
Latham Group is one of the largest manufacturers of swimming pools in the world. It has just been IPO last April. And CEO Scott Rajeski owns a good chunk of the stock, around 4% of the company.
After an early rise, stocks fell about 50%, which is actually quite common with IPOs. (This is a great example of why I rarely get involved on Day 1.)
That said, Latham sounds like a classic long-term, small-cap growth story like Watsco, which I mentioned earlier.
I am still doing additional due diligence on the company. So I recommend that you add it to your watchlist for now. I’ll let you know if and when it’s time to pull the trigger.
Editor, Smart money monday
Initially published by Mauldin Economics on October 25, 2021.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.