Forward Guidance: Rachel Gearhart on the Stock Performance of Founder-Run Companies
Samuel Taube: Joining us today is Rachel Gearhart. She’s the Managing Editor of The Oxford Income Letter and Wealthy Retirement, and you might recognize her work from The Oxford Insight. Rachel, thank you for joining us.
Rachel Gearhart: Thanks for having me, Sam.
ST: Today, we’re talking about founder-run companies and how their stock performance differs from that of most companies.
So let’s start with a really simple question: In business terms, how do founder-run companies differ from other companies? And is there a significant difference in stock performance?
RG: Great question, Sam. As the name suggests, founder-run companies are run by management teams that have “skin in the game.” This means a substantial portion of their wealth is tied up in the companies they run.
Studies have shown that over the past 25 years, companies run by founders or their families have outperformed the S&P by more than 300%.
Our Research Team has been digging into this further, and we’ve found that these companies can return up to 1,791% more than the broader market.
So, to put that in perspective, a $5,000 investment in regular stocks will become $7,800. Companies whose management teams have some skin in the game will turn that $5,000 into $52,950.
ST: Oh OK, that’s a really significant difference. So how many of these founder-run companies are there? And can you give us one or two examples?
RG: Sure. Of the 505 companies on the S&P 500, only 27 of them are run by founders. In other words, 5% of companies are founder-run, yet they trounce the broader market with triple- and quadruple-digit gains.
Texas Energy Holdings is a great example. Chad Willis was only 23 years old when he started the company. Willis’ sister, Karah Boyd, joined the company when she was only 18.
I don’t know what you were doing when you were 18... I certainly wasn’t on the management team of a multimillion-dollar oil and gas company! But clearly, their youth didn’t hurt them…
The company’s revenue jumped from $5 million in 2006 to $44.1 million in 2009. And through November and December, Texas Energy soared 142%.
Wynn Resorts (Nasdaq: WYNN) is another good example. The company’s namesake, Steve Wynn, has been at the helm of the company since he founded it in 2002. He was the former chairman of Mirage Resorts, and he clearly put his industry experience to work quickly with Wynn Resorts.
The company jumped 769% in a little over two years.
ST: I see. Those are compelling examples.
As you know, we’ve previously covered the subject of insider buying and selling a lot - and how that can be a predictor of stock performance. Would you say that founder ownership has a similar effect? And if it not, how is it different?
RG: Absolutely. Founders are the ultimate insiders of a company.
Chief Income Strategist Marc Lichtenfeld recently discussed this in a Wealthy Retirement article.
Truth is, no one cares more about their business or their shareholders than the founder of a company. After all, the founder and their family are usually large shareholders, so their interests are aligned with those of other stakeholders.
It’s one of the reasons that founder-run companies often pay dividends.
And then there are the tax benefits…
If a CEO earns $1 million in salary, the tax rate will be 39.6%.
However, if she earns $1 million in dividends, the tax rate will be 23.8%. That’s a 16% discount on taxes.
So companies run or controlled by founders and their families typically sport a yield more than five times higher than that of the typical dividend payer.
It makes a lot more sense to target companies whose management teams have skin in the game, yet the average investor completely overlooks them. As I said, they make up only 5% of the S&P. So they can be difficult to identify.
ST: I’d imagine. And on that note, where can listeners learn more about investing in these companies?
RG: Marc recently compiled a report on companies like Wynn Resorts and Texas Energy that still have plenty of room to run. He calls them “F Shares.”
If you haven’t heard about them yet, you can access his presentation and report by clicking on the link below.
As I mentioned earlier, our research suggests F Shares could return gains as high as 1,791%.
ST: Wow. That’s really impressive.
So if you want to look into how to get those gains, as Rachel said, there’s a link at the bottom of this article.
Rachel, thank you so much for joining us.
RG: Thanks for having me, Sam.
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