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.
He has continued to buy over the years, with two purchases in 2018 for $35 million and another $25 million buy in 2019.
Even as the stock soared to start 2020, he bought $10 million in February’s big $2 billion secondary offering when the shares were at $767.
Tesla board member, and Oracle billionaire, Larry Ellison, also bought $1 million in shares in that February secondary offering.
All of these purchases made headlines.
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 four or five 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 unknown 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.
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.
Continue reading . . .
Insider “Cluster Buy” Signals Rare Opportunity
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Real Life Cluster Buying During the Coronavirus Sell-Off
In February and March 2020, as the coronavirus spread from China, to Europe, and then ultimately the world, the U.S. stock markets sold off in a dramatic panic.
Some stocks fell 50% or more in just a few short weeks.
This was a buying opportunity the insiders could not resist. And at some companies, a cluster of insiders jumped in to buy.
For example, 7 insiders bought at Sunoco, a master limited partnership that owns 10,000 gas and convenience stations, in March 2020, including the CEO, CFO, General Counsel and the Executive Vice President of Human Resources.
They kept buying as the stock dropped from $20 down to $10.80.
By May 22, 2020, the shares had doubled, up 113%, from that $10.80 level to $25.22.
But it wasn’t just at Sunoco. Clusters of insiders bought in dozens of companies during the coronavirus sell-off.
What did they know that they were so eager to jump in when the sell-off happened?
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 CEO’s like Elon Musk’s February 2020 $10 million purchase, you’ll almost never hear about the non-celebrity CEO’s, 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.
Insider Buying You Don't Want to Miss
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We invite you to look into the portfolio now. You'll see live recommendations with substantial upside including a small-cap financial firm where the CEO and 6 other insiders recently bought more than 109,000 shares of the company stock. This ticker has climbed more than 15% in the past 2 weeks -- and I believe it can still go quite a bit higher in the weeks and months ahead.
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Tracey Ryniec, Zacks' insider and value strategist, is Editor in Charge of the Insider Trader.
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