Four Insiders You Can Count On

By Will Ashworth | October 08, 2009 AAA

I'm a big believer in founder-run companies and high insider ownership. According to a 2007 USA Today article, studies have shown that when founders are still in charge of their companies, the stocks do much better than the S&P 500 over the long term . Here are four stocks with strong family connections and significant ownership positions, that are worthy of your investment.

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Micro Cap -
Life Partners Holdings Inc. (Nasdaq:LPHI)
CEO Brian Pardo and his family own 50.3% of the company. Originating the concept of life settlements in 1997, it is the only publicly traded company focused exclusively on the secondary insurance market. Since developing this unique business, LPHI has purchased close to 6,000 policies with face values totaling $1.9 billion. In the last four years, it's average annual revenue and income from operations growth were 60.5% and 173.4%, respectively. In mid-September, the company announced revenues for the second quarter would increase 17% from $24.8 million to $29.1 million year-over-year and earnings per share will rise 16% from 44 cents to 51 cents. While not off the charts, these increases are more than adequate given the economy and the lack of capital available. I believe the big money will be managing funds for brokers and dealers. It could be as lucrative as mortgage-backed securities. In 2008, seniors sold $11.8 billion in face value of life insurance, twice the number in 2007. This will only grow as the population ages.

Small Cap - Buckle (NYSE:BKE)
This Midwest retailer is my favorite company in the fashion retail business. In 2006, when its same-store sales growth for the year was flat, its operating margin was a very respectable 14.9%. The company knows how to make money in good times and bad. Chairman Dan Hirschfeld owns 38.9% of its stock. He's been with the company since 1965, taking over from his father David who founded it back in 1948. Starting with one store, it now has almost 400, with room to grow. Buckle's latest quarter saw growth slow with sales increasing 13.6% from $169.8 million to $192.9 million year-over-year. Income from operations grew 14.4% from $33.3 million to $38.1 million. Most importantly, its operating margin was 19.8%, 20 basis points better than Q2 last year and almost 500 basis points better than in 2006. The company's in a serious battle with both Aeropostale (NYSE:ARO) and Urban Outfitters (Nasdaq:URBN) to win customers hard-earned dollars. Long-term, I think Buckle will win this retail war.

Mid Cap - MSC Industrial Direct (NYSE:MSM)
MSC competes with Fastenal (Nasdaq:FAST) and Grainger W.W. (NYSE:GWW) in the industrial supply business. The three have combined revenues of $10.14 billion, which isn't chump change. Founded by Sid Jacobson in 1941, the company's now run by his son Mitchell. The extended Jacobson clan owns 38.1% of the Class A stock and 100% of the Class B stock for an overall voting interest of 81.1%; they have a large stake in the company doing well.

Despite a challenging fiscal 2009, it appears MSC's 12-month revenue will be at least $1.47 billion and earnings per share will be $1.92. Unfortunately, when compared to the last two years, the latest results are a disappointment. Analysts estimate 2010 EPS of $1.88, which would mean another year of declining earnings. In September, the company's stock went on an 11-day winning streak to close above $42. Eventually, it will come back down to earth, settling in the $30s, and when it does, I would buy. My reasoning is that despite a difficult year, the company's third-quarter free cash flow was $221 million, more than two times net income and three times long-term debt. It's as solid as they come. (Free cash flow is a great gauge of corporate health, but it's not immune to accounting trickery Free Cash Flow: Free, But Not Always Easy.)

Large Cap - Gap (NYSE:GPS)
Gap founder Don Fisher (32% ownership) died on September 27 at the age of 81. Fisher started with one store in 1969 and grew it into specialty retail's biggest player. Hiring Mickey Drexler (now CEO of J. Crew) in 1983, the two of them went to work building a retail empire that includes the namesake brand as well as Banana Republic, Old Navy, Piperlime and Athleta. With sales closing in on $15 billion and stores around the world, CEO Glenn Murphy still hasn't been able to solve the problem of declining same-store sales, which have been dropping most months for five years now.

Despite this freefall, the company's cash management continues to shine with the latest quarter generating $589 million in free cash flow, up 66% year-over-year from $354 million in 2008. It's no wonder the stock is up 63.4% YTD. Same-store sales mean something, but not at the expense of profits. Murphy et al have done a masterful job controlling expenses. Someday you have to believe they'll get the fashion side of the business right as well. When they do, there's no reason this stock can't hit the $50 mark where it traded in early 2000. (To learn how to dissect same store sales numbers, check out Analyzing Retail Stocks.)

Bottom Line
All four of these stocks have insider ownership greater than 25% and are family controlled. Most importantly, all four are consistently profitable. That's no coincidence.

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