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We love it when a famous CEO buys a large chunk of his company’s stock.
In 2013, Elon Musk, the CEO of Tesla, bought over a million shares of Tesla stock for $100 million even though he already had plenty of shares. It made headlines.
When Elon Musk bought, he was the only insider at Tesla buying at that time.
But what about when non-famous insiders buy their company’s stock and when a bunch of them buy en masse?
This mass insider buying behavior is called a “cluster buy” and it is the strongest signal you can get in insider trading.
When one insider buys, he might be considered an optimist, but when three or four insiders all buy at the same time?
Now that’s a powerful consensus.
But you’re not going to hear about the cluster buys from the media. There aren’t going to be headlines trumpeting the buys of a few corporate Directors and a CFO.
Nope. The cluster buy simply isn’t glamorous enough.
Investors therefore have to dig below the surface to find the insider cluster buys. But once you do, that’s where big rewards can be found.
MORE . . .
3 Insiders Know Something You Don’t
The Senior Vice President and two Directors suddenly poured over $180,000 of their own money into their small cap company that is in the midst of a turnaround. The Directors had already just been awarded shares as part of their compensation but they wanted MORE.
Clearly they expect a major price jump. This company is in a blazing hot industry and has the highest Zacks score for both value and growth.
Monday morning it will be added to Zacks’ insider stock portfolio and you could be among the first to see it. But hurry, this service closes to public entry midnight Sunday, June 5th.
Look inside the portfolio right now >>
Cluster Buying Sends the Strongest Signal
Why do insiders spend so much of their money on their own companies’ stock when they already own a ton of shares already?
Pure and simple.
The opportunity to make more money motivates people – even people who are already well off like highly paid CEOs and CFOs.
When insiders buy in a cluster, it’s because they all know something very good is going on at the company. Maybe it is a new product. Or contract. Or pending merger. Whatever the reason, they are all very confident that shares will be on the rise.
After all, who would buy more stock in a company if they knew it was sinking? And why would there be several of them buying unless they didn’t collectively believe that their stock was a value?
When things at the company are THAT good, insiders don’t want to miss out when everyone else is cashing in. Call it insider peer pressure, if you will.
Buy When the Insiders Buy
When high level insiders buy, they are required to report the purchases to the SEC within 48 hours of the trade. The trade then becomes public information.
Hedge funds and other professional investors routinely use this information to get an edge on their trades.
For most of us, though, it’s not easy to get access to the insider information.
While the media will tout the huge insider buys from celebrity CEOs like Elon Musk’s $100 million purchase, you’ll almost never hear about the non-celebrity CEOs, or other top ranked officers when they buy their stocks.
The challenge is getting easy and reliable access to all the insider trades and then figuring out which ones to buy.
Where to Find the Cluster Buys
Anyone can go on the SEC website and get the insider trading information, but it’s time consuming to search by individual companies.
Some investment firms collect the insider buying data and can provide it to you as a daily list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.
And those lists don’t usually separate out the cluster buys, which sometimes take place on different days in the same week. For example, if you’re getting daily insider updates, you may not realize that the CEO bought on Monday but three Directors bought on Tuesday. You may pass by those ‘hidden’ cluster buys without even realizing it.
Even if you got a list of the cluster buyers, how would you narrow it down to the stocks that are truly worth buying? If I’m going to buy when the insiders are buying, I want to buy only their top picks.
Our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings and valuations.
Today only 10 stocks meet the demanding criteria of our Insider Trader portfolio.
And Monday morning I’m adding a cluster buy in which a Senior Vice President and two Directors dipped deeply into their own pockets to buy shares. The Directors had already been awarded shares for free but they wanted more. This is another signal that something very good is about to happen with the stock.
You are welcome to share our insider trades with explosive gain potential, but access must be limited. Entry closes to new investors Sunday, June 5th.
Look inside the Insider Trader right now >>
Tracey Ryniec is Zacks’ value strategist and is the Editor in Charge of our Insider Trader.
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