Why High Insider Ownership Is Not Always A Good Thing

by: Edgar Ambartsoumian

Large insider ownership is usually an indication that shareholders should receive a good return on their stocks. The common theory behind this is that insiders that have large stakes in the company, will act according to their own benefit, as well as the shareholders'.

However, the flipside to this theory is that managers might not partake in riskier projects, hence resulting in modest EPS growth. With this in mind, I was able to pick out several companies that not only have at least 40% insider ownership, but also have solid growth potential with PEG ratios below 1.


Insider Owership Market Capitalization PEG Ratio P/E Beta
Penske Automotive Group, Inc. (NYSE:PAG) 51.37% $1.67 Billion 0.57 10.32 2.09
Southern Copper Corp. (NYSE:SCCO) 80.08% $24.02 Billion 0.81 10.58 1.62
Amerco (NASDAQ:UHAL) 71.16% $1.61 Billion 0.74 8.16 1.04
Cubic Corporation (NYSE:CUB) 40.89% $1.12 Billion 0.74 13.20 0.91
Sodastream International Ltd. (NASDAQ:SODA) 60.38% $609.31 Million 0.68 22.53 N/A
China Mass Media Corp. (NYSE:CMM) 76.78% $608.94 Million 0.96 7.20 2.00
Usana Health Sciences (NYSE:USNA) 53.90% $441.17 Million 0.59 9.36 0.81

When insiders increase their share in company ownership, it can also become a double-edged sword. High insider ownership can seldom result in unaccountability, since managers can keep their jobs under any type of circumstances. Eric Fox, the founder of Brittain Capital Management, LLC. states,

Another problem is that the common statistical services that maintain tracking of insider ownership will usually count when another corporation owns a high percent of a company as an insider. While this is technically accurate, when a public company owns a high percent of another company, it may be in the middle of spinning off that company, and has already completed the first stage. This type of a high ownership will then give a false signal to value investors, and can't be reconciled with the original intent of the strategy.

While insider ownership can be viewed as a positive attribute, it should be noted that minimum to average levels instead of high levels over 70% are preferred, since it could just mean better outcome for the shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.