And that’s the point here. Larsen doesn’t seem keen on keeping investors up to date with how he manages his enormous VirnetX stake. Institutional shareholders have been increasing their ownership of VirnetX in recent quarters, but the stock remains a plaything for high rollers and risk chasers. It shows in the very high public ownership rate.
A cautionary tale
I’m including Eastman Kodak here as an extreme example of gambles gone horribly wrong. The storied photography expert finally filed for bankruptcy last year, leaving banks and other serious investors little choice but to bail out overnight.
This is what an unmitigated disaster looks like, with 97% of the over-the-counter shares in the public market. There’s nothing wrong with regular people making informed investments, but none of these Kodak owners seem to have read the company’s Chapter 11 filings.
The company promises to maximize value for stakeholders like employees, retirees, creditors, and suppliers — but shareholders don’t even enter into the equation. When Kodak comes back from Chapter 11, the old stock will most likely be replaced by an entirely new stub, like so many airlines and automakers did before Kodak.
Again, some public ownership can be healthy, and it’s what we Fools are all about. But when you jump into 90% public ownership or more, there’s something seriously wrong.
Big gains, small individual bets
Let’s wind down this discussion on a positive note. Dell Inc. (NASDAQ:DELL) and Netflix, Inc. (NASDAQ:NFLX) have a couple of things in common:
* Activist investor Carl Icahn holds a very large stake in both stocks.
* The vast majority of both companies is owned by banks and mutual funds. The “smart money” leaves little room for individual investors in either case.
* Both stocks have absolutely crushed the market in 2013, albeit by different methods.
Dell Inc. (NASDAQ:DELL) is up 35% this year on the back of a simmering buyout battle. The computer systems builder will soon go private under the wing of CEO and founder Michael Dell and his private equity partners — or get a cash infusion from Carl Icahn and his partners while staying publicly traded. Whatever the final outcome, the gains are pretty much locked in. And who gets to cash in on this jump? Mostly the “smart money” big-ticket managers.
Netflix, Inc. (NASDAQ:NFLX) has nearly tripled in 2013 thanks to massive subscriber growth, high-quality original content bets, and an exciting international growth strategy. Carl Icahn wanted to force a sale of this company in 2012, but has now settled in for the ride with no further buyout plans.
And once again, big banks are reaping most of the rewards here. Netflix’s largest owners include Icahn and big investing firms like Vanguard, BlackRock, Inc. (NYSE:BLK), and T. Rowe Price Group, Inc. (NASDAQ:TROW). Some of these names should be familiar from our Berkshire Hathaway Inc. (NYSE:BRK.B) discussion, if nothing else. So the same smart money that’s betting heavily on Warren Buffett also trusts Netflix CEO Reed Hastings to take good care of their capital.
If there’s anything wrong with the Netflix structure, it might be that Hastings only owns about 1.7% of the company. Foolish investors like to see somewhat larger CEO stakes than this, in order to align management’s goals more closely with those of common shareholders.
Then again, Hastings’ Netflix investment is worth $262 million right now, which is hardly chicken feed. And Foolish founder and leader Tom Gardner should appreciate Hastings’ involvement for another underappreciated reason: “That’s a really good, simple screen: looking for companies where the founder is still the CEO.”
So there you have it: a handful of strikingly different ownership structures and some clues on what the various models might mean. Remember, it always helps to dig a little deeper than the raw numbers, but simple ownership figures can give you a good starting point for further research. Feel free to share your own insights in the comments below.
Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+. The Motley Fool recommends Berkshire Hathaway Inc. (NYSE:BRK.B), BlackRock, and Netflix. The Motley Fool owns shares of Berkshire Hathaway and Netflix.
The article Should You Always Follow the “Smart Money”? originally appeared on Fool.com and is written by Anders Bylund.
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