The success of insiders buying their own stock is legendary.
The success of other investors following insiders is much less splendid…til now.
As you probably know, I am the Executive Vice President of Zacks Investment Research. And over the last 10 years in that capacity, I have been witness to many more research failures than breakthroughs. Yet I tell you that this is one research effort you need to pay attention to. That’s because we have truly uncovered the key ingredients from insider trading that leads to outsized gains for investors.
Let’s take the story from the top so you can fully appreciate how to profit from insider trading information in the months and years to come.
Why Do Insiders Buy Their Own Stock?
One reason only: To make more money.
But consider this. Most insiders already own a truckload of their own stock. So they will only pile on more shares if they believe the risk is trumped by an even greater reward.
Not surprisingly these insiders have tremendous success with these trades. Even less surprising is why other investors scour insider buying activity to try and get an edge over the market. But most investors looked in the wrong places and thus achieved sub-par results.
So our team set out to solve the mystery of how to profit from insider buying activity. Gladly after a lot of long hours we found 4 clues that pave the way to outsized gains. Read on for the details of each of the 4 elements. Some may surprise you.
1) Size Does NOT Matter
Too often investors focus on the largest insider purchases. Yes, those big $100 million plus buys make for the most exciting headlines, but that information alone does not lead the way to the most profitable trades.
The real key is the number of insiders who are purchasing at the same time. You could say “the more insiders, the merrier the stock price”.
The reason is simple. The more insiders buying shares means the more confident they are of their future success, and the more likely company earnings will be on the rise and the higher the share price will go.
2) Weak Share Price BEFORE Insider Buys
Most traders only feel comfortable buying a stock that has been on the rise of late. Yet in this realm we are much better off doing the opposite.
The fact is that insiders like buying their company shares when they think it’s absurdly cheap, thus giving them handsome odds of success. Often that comes after some bad earnings news and the shares get pounded.
Obviously if these insiders thought that prospects for the firm would continue to decline, then they would not buy more shares as it would have disastrous consequences. So these insider buys, after stock price declines, often signal the biggest chance for gains.
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Deadline Nears for New Zacks Approach to Insider Trading
Our research team just unlocked a way to follow insiders at selected companies to substantial stock gains. Tests show that the new strategy can actually more than triple the performance of Zacks #1 stocks. Even while the S&P plunged during bearish 2008, these insider picks racked up a double-digit GAIN.
Don’t worry, it’s legal and ethical. But you should know that demand has been exceptional, so it will close to new investors Monday, May 30.
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3) Don’t Be Afraid of Zacks #3 Rank Holds
This may be the hardest part to swallow for loyal Zacks Rank followers. But bear with me for a minute and you will clearly understand why there is no shame in buying up Zacks #3 Ranked stocks experiencing insider buying activity.
Consider point #2 above. Insiders like buying more shares when they are depressed beyond fair value. And often that happens after disappointing earnings news.
Most likely analysts won’t be happy with what they see from the earnings reports, leading to weak estimate revisions and a Zacks Rank of 3 (or worse). Yet our studies clearly show that Zacks #1, #2 and #3 Ranked stocks do the best when coupled with insider buying. In fact, when we removed #3 Ranked stocks from the study the performance actually dropped a bit.
So why would #3 Ranked stocks be better than average when it comes to following insider trading signals? Because they are likely to be #1 Ranks in the FUTURE when the good news, which only insiders know about, becomes public knowledge. Powerful stuff indeed.
4) Timeliness
Insiders have to report their trades within 48 hours. The information goes live on the SEC website shortly thereafter and then the clock starts ticking.
Gladly most people following the insider trading activity are professional money managers. And the reality is they are just too darn slow making their trading decisions.
Remember that most funds are nearly 100% invested at all times. So even if there is a stock they want to buy right now, they first have to figure out what to sell. And the larger the fund the more likely it is to be managed by committee, which slows down the process even further.
Studies show that professional money managers often take 4 weeks or more to fully act upon their trading ideas. This gives individual investors like us a running head start to profit from this information before the elephants come stampeding in.
Where to Find the Best Insider Trading Stocks
We have successfully combined the elements above, along with a few other proprietary elements, to create a dynamic insider trading strategy. Yes, the +41.2% average annual return of the strategy is impressive. But what really caught my attention is how it racked up double digit gains while in the grips of the last bear market in 2008.
If you would like to receive our precise insider trading signals in the future, then we invite you to become a charter member to this new promising service: Zacks Insider Trader.
But a word of caution. New subscribers are filing in so fast that we have decided to close the doors to new members Midnight Monday, May 30. Therefore, if this strategy appeals to you…and it should, then don’t delay. Click the link below:
Learn more about the Zacks Insider Trader
Wishing you great financial success,
Steve
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its leading products for individual investors. He is extremely proud to share with you our latest breakthrough for investors, Zacks Insider Trader.
