Market Overview

When "Insider" Greed Is Good

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What do Elon Musk and Mary Dillon have in common?

Both are CEOs who have bought shares of their own companies just before the share prices moved higher.

You have probably heard of Elon Musk, the CEO of Tesla. In 2013, he made a big statement by buying over a million shares of Tesla stock for $100 million even though he already had plenty of shares.

Musk went out on the limb even further, as he had to borrow the money from Goldman Sachs to buy the shares. He used his previous holdings in Tesla, and stakes in other companies, as collateral. Since then, shares of Tesla are up over 236%.

But who is Mary Dillon?

She's the President and CEO of Ulta Beauty, a cosmetics and beauty product retailer with stores across the United States.

The CEO of Ulta bought nearly a million dollars' worth of shares on the open market in March 2014 and September 2014.

Since the March 2014 purchase, shares are up 123%.

Clearly it is beneficial for investors to follow insider buying activity. Digging below the surface to find the obscure purchases by folks like Mary Dillon is where the big rewards can be found.

Insider Buying Sends a Strong Signal

Why would these two CEOs spend so much of their money on their own companies' stock when they already own a ton shares already?

Greed!

Pure and simple.

The opportunity to make more money motivates people - even people who are already billionaires like Elon Musk.

If top insiders are buying, it's because they 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 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???

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 huge insider buys like Elon Musk's $100 million purchase, did you hear anything about Mary Dillon's $475,000 purchase in September 2014?

More recently, the top insiders have continued to buy. But did they report it on the front page when Charles Swoboda, CEO of Cree, bought 10,000 shares in October 2016? Of course not. Yet Cree is up 46% since that purchase.

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 Insider 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 weekly list. Have you ever seen one of those lists? The sheer number of companies can be overwhelming.

In some instances, the insiders have been known to buy en masse. Then what's an investor to do?

This happened during the stock market dip in August 2011. As stock prices fell, insiders felt that their companies were undervalued and rushed out to buy shares.

That August, insiders bought stock in 50 different S&P 500 companies in just one week. Even if you got a list of those stocks, how would you narrow it down to the stocks that were truly worth buying?

To solve this problem, our Zacks research team developed a strategy that monitors selected insider buying activity at companies that already show strong earnings and excellent valuations. We do the work of sifting through all the insider buys so you don't have to.

Just a handful of stocks meet the demanding criteria of our Zacks' Insider Trader. Right now, we've narrowed it down to 9 insider buys that make the grade.

One recent move was by a member of the board at a leading brokerage firm. This director reached into his pocket and bought 5,000 shares with $209,850 of his own money, even though he already owned thousands of shares and receives stock as part of his compensation.

He also bought when the stock was trading near new highs - which is another compelling signal. Insiders usually buy when prices are irresistibly low. The stock is a Zacks Rank Strong Buy and has already made double-digit gains since we added it to the Insider Trader portfolio.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributors Elon MuskNews Insider Trades

 

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