Pay attention to big insider buying

CNBC’s Jim Cramer said investors should usually wait until high-quality stocks have had a pullback before buying. But sometimes it’s worth buying some stock at the top, especially if a company engages in significant insider buying.

Not to be confused with insider trading, insider buying is based on public information and occurs when executives buy shares in their own company. Insider buying can signal that a company expects its stock’s value to increase.

“For me, buying after a big rally can certainly feel reckless, and even lazy. Most investors are smart enough to wait for a pullback before they pull the trigger,” he said. “But insider buying after a decent run tells me that one of the people who knows the business best doesn’t believe there’ll be a pullback, and there’s nothing more bullish than that.”

Investors are right to be skeptical when it comes to insider buying, Cramer said. Sometimes inside buyers try to game the system and project false confidence, but to Cramer, a high volume of insider buying on a stock that’s already doing well usually means the stock is set to go higher.

Cramer said he knows it’s ideal to wait until one of these stocks has a pullback before buying, but said that’s a best-case scenario that doesn’t always happen when insiders are buying up much of their own shares. He advised securing a small position near the high and waiting for a decline before buying more.    

“When the insiders buy a whole lot of shares that’s a pretty powerful endorsement. Crucially, it’s the volume of the insider buying that declares its sincerity,” Cramer said. “But we’re only focusing on one sort of insider buying right now, the kind you see in stocks that’ve been running and aren’t perceived as being historically cheap or low-dollar amount plays.”