One of the best buy signal for stocks is insider buying. But with insider cluster buying you raise the odds. This method is about following the money to big gains. However, you must be able to read between the lines.
1. Do not jump in and buy when just one insider buys. That is not a confirmed indication that the stock of a company will appreciate any time soon.
2. Note the buy-to-holdings ratio. For example, if an insider holds 20 million shares and adds 20,000 shares to his holding, the 1-1000 buy-to-holdings ratio is more or less insignificant.
3. Check the news. If the insider or insiders are buying after a bad earnings announcement and/or even worse, a bad outlook for the future, it could take much longer before the bet pays off.
3. Look for cluster buying, where more than two insiders buy at varying prices, preferably at increasing rather than lower prices over a longer period of time. The best indication is when most of the insiders are officers because they have more at stake.
4. Don’t pay attention to insider selling, as it is not a proven indicator. It can be the result of many factors, such as tax or estate planning, diversifying, buying a property or a costly divorce. In contrary, insider buying usually means there is good news ahead.
Following insider cluster buying is incredibly powerful when you know what to look for.
Sven Franssen