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My No-Brainer “Shortcut” for Finding Stocks with Huge Upside

There are no shortcuts in investing.

Well, maybe one…

There are no shortcuts in investing.

Well, maybe one…

This “shortcut” is really just a simple strategy. But it can easily boost your returns by 6% or more every year. That might not sound like much. But when a $100K portfolio beats the market by 6% for a decade straight, it translates into $154,000 more in your pocket. And you don’t have to do much to get it.

• Simply invest in companies where insiders have a lot of skin in the game.

We all know that Amazon (AMZN), Netflix (NFLX), and Tesla (TSLA) have handed monster gains to shareholders. They’ve soared 342%, 416%, and 2,135%, respectively, in the last 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.

This is no coincidence—stocks with strong insider ownership tend to do better than most. In fact, one study found that when insiders purchased shares of their own companies, those stocks outperformed the market by more than 6% annually.

• Tracking insiders is an easy way to find great investment ideas.

That means tracking their buying activity and the size of their holdings. The more skin insiders have in the game, the more committed they are to bolstering their company’s long-term profits.

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 car, a house, or a billion-dollar company, you take better care of it.

That’s not always the case with hired guns who run public companies. It’s not that they don’t care. But they focus on short-term issues like, “What does next quarter look like?”

Meanwhile, an insider with a big stake will focus on the long term. He’ll ask himself, “How can I grow the value of my investment for myself, my family, and my investors?” Those are the guys we like to invest with.

• Heavy insider investment is one of the many reasons I like small-cap stocks.

It’s common for insiders, and founders in particular, to own large slices of these companies.

Albert Namad, the CEO and chairman of Watsco (WSO), is a great example. Watsco is the largest HVAC distributer in the US. After Namad took a controlling interest in the company in 1973, he grew annual revenue from $5 million to $5 billion.

Along the way, shares of Watsco shot from $6 to $289. And Namad’s stake is now worth $440 million.

• Following insiders with big stakes is a reliable path to profits…

I’ve shared some of these opportunities with you here in Smart Money Monday. Opportunities like steelmaker Cleveland-Cliffs (CLF), where CEO Lourenco Goncalves owns approximately 1% of the company. Goncalves is a big reason I like Cleveland-Cliffs. Under his leadership, it’s acquired a monopoly-like hold on US iron ore and flat-rolled steel production.

Earlier this month, Cleveland-Cliffs agreed to buy a leading scrap metal company for $775 million. It’s exactly the kind of smart deal I would expect from an insider like Goncalves, who has a lot of skin in the game. I own shares of Cleveland-Cliffs, and it’s still at buy at current prices.

• Strong insider ownership is also a big reason I’m tracking Latham Group (SWIM).

Latham Group is one of the largest pool manufacturers in the world. It just IPO’d last April. And CEO Scott Rajeski owns a good chunk of stock—around 4% of the company.

After an early surge, shares have fallen around 50%, which is actually pretty common with IPOs. (It’s a prime example of why I rarely get involved on Day 1.)

That said, Latham looks like a classic long-term, small-cap growth story like Watsco, which I mentioned earlier.

I am still doing some additional due diligence on the company—so I recommend adding it to your watchlist for now. I’ll let you know if and when it’s time to pull the trigger.

—Thompson Clark
Editor, Smart Money Monday

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