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  1. Home
  2. / Investing
  3. / Financial Services

Good Company Insiders Can Be a Plus

They may have more incentive to be shareholder-friendly.
By TIM MELVIN Sep 10, 2013 | 11:00 AM EDT
Stocks quotes in this article: GIS, BERK, KCLI, SENEA, SENEB

Everyone likes to have a partner in the endeavors of life. It just makes it easier to navigate the water of life and business to have someone working with you to face off against all those who are working against you.

When it comes to the stock market, investors can gain a valuable partner by looking for companies where insiders own a significant amount of stock. Walter Schloss was a big advocate of buying shares in companies with significant insider ownership as it put you both on the same side of the table. You both want the business to prosper and the stock price to go higher.

A caretaker management and board with no real stake in the equity of the company they run may be more concerned about the compensation package that your stock price. Those with significant ownership have skin in the game and may have more of an incentive to run the business in a shareholder-friendly fashion.

Of course, you have to look out for those few owners who are running the company like a personal fiefdom and looting the treasury. It makes sense to read the 10Qs and 10Ks to make sure the controlling shareholders are not engaging in excessive-related transactions and using the corporate coffers to pay large sums to family and friends. Excessive compensation is also a good sign your company may be run by a looter rather than a builder, but these are fairly easy to find and to avoid by doing a little reading.

I ran a quick screen this morning, looking for cheap stocks that have a high concentration of insider ownership. One stock near the top of the list is an old favorite. I have owned Kansas City Life (KCLI) for some time and suggested the stock here on RealMoney on several occasions.

This is not a particularly exciting company. They sell life insurance, annuities and group insurance in 49 states and the District of Columbia. The stock trades at less than 70% of book value and is not on anyone's hot stock list. It is a conservative company and everyone in charge seems to be well aware that the better they do the wealthier they get over time. That's the kind of partner that can help you get rich in slow and steady fashion.

Seneca Foods (SENEA), (SENEB) is another company where insiders have a vested interest in a higher stock price. My only problem with this company is that they do have one of those A and B share arrangements that allow for super voting majorities, but management has not abused the structure, in my opinion.

The company is a basic business as they pack and sell canned and frozen vegetables under the Seneca, Libby's and other regional brands. They also pack canned and frozen vegetables for General Mills (GIS) under the Green Giant brand under a long term contract. The stock is cheap at 84% of tangible book value and insiders won 45% of the company.

Berkshire Bancorp (BERK) is one of my favorite little regional banks. They have 12 branches in the greater New York City area and a total of $783 million in assets. The company fits my perfect bank description with an equity-to-assets-ratio of over 15 and non-performing assets that are a ridiculously small .11% of total assets. The stock currently trades at just 86% of tangible book value.

To be fair, I have owned the shares for a couple of years now and it has done the sum total of nothing so far. But it is safe and cheap, and I am highly confident I will be more than rewarded for my patience. Insiders collectively own 70% of the bank, so one has to imagine they will take steps to run the bank in such a manner that the shares gain value over time.

I have heard all the reasons to avoid high levels of insider ownership over the years. They can block a takeover if they do not like the price. Because of the high level of ownership, the float tends to be small and the shares may not be very liquid.

These are all true to some degree. But if you find the right people running the right companies and can buy at the right price, it's like taking on a partner who does all the work for you.

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At the time of publication, Melvin was long BERK and KCLI.

TAGS: Investing | U.S. Equity | Financial Services | Stocks

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