Insiders offer valuable guidance
When evaluating small companies, find out whether insiders or institutions own many shares.
Insider holdings are generally good. If employees own a chunk of a company, they have an incentive to make it succeed. Insiders buying shares is also promising, as they must expect the shares to rise. Don’t be alarmed by insider sales, though. Company stock is a major portion of many executives’ compensation, so they may occasionally sell some shares to send a kid to college or buy a car. Still, lots of executives selling is a red flag.
With small companies, we like to see insiders owning 15 percent or more – and little ownership by institutions such as mutual funds and pension funds.
When good small companies have little or no institutional ownership, it’s often because the big players are sidelined. Small firms usually have relatively few shares outstanding, and their total worth is modest. Imagine Farm Dogs Inc. (ticker: BINGO). It has just 20 million shares outstanding, valued at $5 each. (Total market value: $100 million.) Institutions that might typically buy $10 million worth of shares can’t do so with Farm Dogs without buying fully 10 percent of the entire company, something they’re often prohibited from doing.
Those who discover Farm Dogs early and buy shares before Wall Street does stand to benefit. Once Wall Street gets involved, institutions will begin buying lots of shares. All that demand will boost the stock price – and the wealth of existing shareholders.
Discovering a small but growing company with significant insider ownership and low institutional ownership is a promising prelude to finding a rewarding investment. The company should be sound, though, with growing sales and earnings and a strong competitive position, among other things.
Ask the Fool
Q: How is inflation measured? — S.P., Syracuse, N.Y.
A: Meet the U.S. Consumer Price Index. According to the Bureau of Labor Statistics, the CPI “is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” These “urban consumers” reflect 87 percent of the U.S. population, and the “basket” includes items such as cereal, fuel oil, pet food, rent, postage, cigarettes, college tuition, prescription drugs and haircuts.
Q: Is renter’s insurance worth it? – B.W., Ocala. Fla.
A: Definitely consider getting it. It can protect you against theft of or damage to your personal property, cover some or all of your personal liability, and maybe even pay for temporary housing if your apartment is damaged.
When signing up, you decide the total dollar value of the property you want to insure. Some policies will pay you enough to cover the depreciated value of various items at the time of loss, while others will cover replacement costs. The latter is much better.
Renter’s insurance can cost as little as $100 or less per year. Compared with the losses you might incur, it’s often well worth it. Learn more at www.fool.com/insurancecenter and www.iii.org.
My dumbest investment
I was working for a company that provided raw materials to a company in the hydrogen battery business. It had big backers, such as Chrysler, and I was carried away with the hydrogen hype. I did no research, because it just had to be good — right? I mean, gas prices were rising, people were concerned about the environment … How could it fail? Easy. Management spent money faster than a Hummer burns gas, and there was a plethora of competitors, too. The biggest error in this mess: NO RESEARCH on my part. Still, I’m down only 95 percent on my investment – it’s not bankrupt yet (check back in six months). Who knows? It may still come back. – Chris Acton, Salt Lake City
The Fool Responds: Be careful. You don’t sound like you have much confidence in the company. If so, then you should consider putting your remaining dollars in stocks in which you do believe. And of course, next time do more research. Determine the firm’s competitive position and financial health, to start.