In yesterday’s Trade of the Day, I wrote about the Cleveland-Cliffs (NYSE: CLF) insider play I recommended in The War Room. The thesis behind the trade was simple. I saw good cluster buying by insiders, and that triggered a buy signal.
Usually, insider plays take weeks or months to play out. This one played out in a matter of a couple days!
War Room members entered Cleveland-Cliffs on Tuesday at prices between $8.45 and $8.50. Yesterday they exited at around $9 for a quick base hit. This play was another example of how we can profit from all types of trades, including stocks, in The War Room.
As a refresher, insider buying is one of the best signals in the market. However, you must be able to read between the lines…
Below is a checklist you should follow:
- Do not buy when just one insider buys. That’s not a confirmed indication of anything.
- Note the buy-to-holdings ratio. For example, if an insider holds 20 million shares and adds 200,000 shares… that means nothing for the purposes of a short-term trade. Insider buying by a major shareholder is not a confirmed sign either, as it could be an indication of a major holder adding to a position.
- Check the news. If the insider or insiders are buying after a bad earnings call and even worse forward guidance, it could be years before the bet pays off.
- Look for cluster buying, where more than two insiders buy at varying prices – preferably at higher and higher prices.
- Look for four or five insiders buying over a long period of time. The best indication is when most of the insiders are officers – they have more at stake with their compensation.
- 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, or buying a new house. But insider buying usually means one thing: There is good news ahead.
Action Plan: Keep this checklist by your side, and when you see insider buying reported, make sure it meets the checklist before diving in.
As for Cleveland-Cliffs, it’s now a closed position in The War Room, but it’s on our screens for a future buy on a pullback in the overall market.