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.
In June and October 2018, he was at it again with another two purchases totaling $35 million in shares.
All of these purchases made headlines.
When Elon Musk bought in 2013 and 2018, 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.
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.
Real Life Cluster Buying
In 2018, there were some great examples of cluster buying in the energy sector.
In November and December 2018, as crude plunged to multi-year lows, the oil stocks, especially those of the exploration and production companies, saw swift sell-offs.
But nowhere were the insiders as eager to buy as at Matador Resources.
Eighteen corporate insiders bought thousands of shares in November and December of 2018, including a bunch of directors, the CEO and CFO. That is an enormous cluster buy.
Shares are up over 19% from the Dec 24, 2018 lows.
But it’s not just the Matador insiders who are buying. In November and December 2018, clusters of other energy insiders were buying up their shares on the cheap too.
What did they know that they were so eager to jump in when the sell-off happened? Some even bought more shares as the stocks got cheaper.
Continued . . .
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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 October 2018 $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.
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For example, there’s a little-known regional financial company that insiders are pouring their own money into.
Eight key officers feel so good about the stock price going up that they bought $2.3 million dollars worth of shares:
• The CEO invested $996,500
• The COO/President spent $995,000
• The CFO jumped in with $99,979
• 5 directors kicked in a total of $171,794
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Tracey Ryniec, Zacks' insider and value strategist, is Editor in Charge of the Insider Trader.