Insider Buy Superstocks by Jesse Stine

I came across this book “Insider Buy Superstocks” and I found it to be a very interesting read. This book has some very important concepts to achieve great returns in investing. Here is a brief summary and review of this book.

It is written by Jesse Stine, a rather private individual who keeps a low profile.

About the Author

Not much is known about Jesse Stine but what we  know about him is that he turned $46,000 into $6.8 million. That means he managed to generate 14,972% returns in just 28 months that’s really spectacular trading results. You can read more of his profile in the link above.

Pareto Principle

The Pareto Principle is something that Jesse Stine mentioned in this book several times. This is also known as the 80/20 rule where 80% of consequences come from 20% of the causes, asserting an unequal relationship between inputs and outputs.

Jesse Stine pointed out that successful investing requires us to examine the basics in an organized fashion  and disregard the rest. He wants us to focus all on what really matters. This is the 20% of variables that actually make a  difference in our investments and put aside the rest of the information. I think with the current abundance of information available online, this Pareto Principle is really important for us as investors because we are bombarded daily with information about the stock market. We are presented with a lot of information all over the web, especially social media.

The pareto principle teaches us to just focus on the 20% of variables that makes the largest amount of difference for investing and trading results and we disregard the rest of the 80% of information that does not make a lot of difference  in now investing in trading.

There is a tweet by Mark Minervini, a very successful investor in the stock market, which emphasizes on the power of narrow focus;

Jesse Stine’s Composition of a Superstock

Jesse Stine emphasizes on chart patterns as he believes that charts paint the whole picture before the fundamental story becomes evident. Do note that we should not look at these criteria individually but rather, a combination. The company will become a Superstock when they meet most of these criteria.

1) Low float, Price > $15 , PE ratio < 10

Jesse Stine looks for companies with low float and a small market cap. The float of a stock is the number of shares available to trade in the open market. He wrote that best performing stocks generally have floats under 10 million shares and they also tend to start with  market capitalization under $100 million.

He opined that the sweet spot for a stock to begin their largest percentage moves is ideally within the range of $4 to $15 per share.

The PE ratio is not a very important criteria to Jesse Stine. His reason for having this is that a company valued at a PE ratio of below 10 means we are entering a growth stock at a low valuation. This limits our downside risk immensely.

2) Breaks out of strong base

He focuses on weekly and monthly charts and one of his criteria is that there must be a huge weekly volume thrust out of a strong base. There must also be a high angle of price trajectory. A stock with a strong base is one which has traded sideways in a narrow range for an extended period of time (anywhere between a few weeks to a few months). This base also acts as a level of support which helps to increase the risk-reward ratio. A good example would be stock $WNC.

$WNC jumped after earnings beat.

You see where the base is and after the stock breaks out of the base with high volume in late Oct, the stock charges up from around $16 all the way to $25. This huge move to the upside was preceded by a strong base which was formed over a few months in a narrow range.

3) Blockbuster Earnings

Besides meeting the above technical criteria, it is also important to focus on the fundamentals of a stock.

In this case, a Superstock must have blockbuster sustainable earnings release with high operating leverage. We want to see earnings that are trending higher over the past few quarters. In addition, we also want to look for earnings beating expectations.

In the book, Jesse Stine second fundamental criteria is to look for sustainable earnings. This means that we should not consider one-off earnings (perhaps due to sale of assets). In this aspect, we would have to do a little homework to assess whether the company can continue to produce this result consistently. We can get more colour on this by reading their 10-Ks, annual reports or listening to their earnings call.

One of the things to look out for is whether they have an increase in backlog. Backlog is the amount of future business a company currently has under contract but has not yet completed. With the backlog, we will be able to forecast and estimate how much revenue the company will earn in the coming quarters.

Operating leverage is how much a company’s net income will increase per dollar of additional revenue. Firms with high operating leverage tend to have low level of variable costs relative to their fixed cost (scalability).

4) Open Market Insider Buying

Insiders sell for a variety of reasons but they only buy for one reason. These insiders believe that the price of the stock will increase in the future.

What we are looking for here is that we want to find open market purchases by multiple C-suite executives or directors. These insiders are personally buying their own stock and this tells us that they are confident about the future of their business. Who else has the fastest information about the future and the health of the company than the insiders themselves? So ideally, we want to see open market insider buying taking place either during a long base building period or just after the initial breakout.

5) Super Theme

Every Superstock has a theme to attract the attention of the retail traders. It could be either a industry-wide or company-specific theme. Like how Man is attracted to shiny objects, stocks need an “IT” factor to stir up speculation.

The most recent super theme would be crypto and electric vehicles. You can see anything related to these sectors mooning.

A good example of a company specific theme would be Singapore listed AEM holdings (SGX:AWX). AEM manufactures testing equipment for the semiconductor industry. In FY15/16, they released a new generation modular tester, announced large book order and has Intel as their key customer. The key word that they kept repeating is “multi-year ramp up cycle”.

When to Buy a Superstock

Identification of super stocks is just the tip  of the iceberg. We also have to take into account the optimal buy point, sell point and the psychological preparation. These are much more difficult to master.

1) Wait 2-3 weeks after initial earnings breakout

Many biggest winners tend to provide excellent low-risk entries 2-3 weeks after their initial breakout earnings announcement. After a substantial earnings beat, most Superstocks will gap up and trade well above the previous day’s close. As enthusiasm wanes, Superstocks tend to settle down for a couple weeks while volume steadily declines.

Of course, we must avoid stocks that breakout due to one-off earnings beat. Look for sustainable earnings.

2) Buy Light and Tight

At the tail end of a multi-base building period, a Superstock will tend to move within a very tight band on relatively light weekly volume compared to prior weeks. Ideally, Jesse Stine prefers to see volume decline to roughly 30-50% of the peak volume seen during its largest advances.

Therefore when volume returns, it is usually set for another large move.

3) Buying at the “Magic Line”

Jesse Stine theorizes that every stock has a “magic line,” or specific weekly moving average that it adheres to and should be used for dip-buying and selling positions. What he’s doing is the definition of curve fitting.

I’m not very adept at chart patterns and indicators, but I feel that he is keeping it simple with his technical analysis principles. He uses a rather qualitative approach and does not apply a concrete system to his technical analysis.

When to Sell a Superstock

When, or how, to sell your stocks is usually the aspect left out of most trading books, or it is quickly glazed over. I myself have trouble deciding when is the best time to sell. Noticing this, Stine wrote an entire chapter on the subject, identifying potential sell signals both for fundamental and technical reasons.

According to him, the chart takes precedence over other factors. The chart will tell you when is the best time to sell. One of the signal is when it has a record weekly range. In other words, when the weekly candlestick is drastically wider than the previous few dozen weeks, and the stock is already “overextended,”

Other than technical charts, there are also other important fundamental actions to take note;

  • Sell at price target, or when risk/reward is no longer favorable
  • Sell secondary offerings/private placements without hesitation
  • Sell the end of a sequential earnings ramp
  • Sell any stock split
  • Sell massive insider selling
  • Sell headlines
  • Sell message board euphoria
  • Sell expansion
  • Sell if you become a genius
  • Sell confusing earnings reports
  • Sell tax loss reversals
  • Sell pre-earnings euphoria
  • Sell the fluff
  • Buy the rumor and sell the news
  • Sell stock advertisements
  • Sell “strategic alternatives”

Don’t Listen To The News

It is Wall Street’s worst kept secret that they are using the media to manipulate markets to enter and exit their stock positions. Our job is to sieve through the news and spot the bullshit. Jesse Stine also called out Goldman Sachs as the “best in the business” of market manipulation.

I agree with this point as I believe that every news outlet has their own agenda and we cannot take everything at face value.

https://walterkirn.substack.com/p/the-bullshit?r=3bowa&utm_campaign=post&utm_medium=email&utm_source=twitter

I like one of his secondary indicators called the “Dumb Friend Indicator”. Always be on the lookout for your friends who have the worst luck in the stock market, buying at the top and selling at the bottom. This is similar to the Inverse Jim Cramer ETF joke.

You all would have heard of the Jim Cramer is. He runs the show “Mad Money with Jim Cramer” on CNBC. Currently, people are having the idea that bets against whatever Jim Cramer does. Called the “Inverse Jim Cramer”. One fund created and backtested this strategy and found out that it performed pretty well. It generated a CAGR of 17.16% since 1st Jan 2021. In the same period, the S&P500 generated a negative year-to-date of 22.96% and a negative one-year return of 18.24% for the same period.

https://seekingalpha.com/article/4548867-the-inverse-jim-cramer-strategy-q3-2022-update

Summary

Being more of a fundamental investor, I actually enjoyed Insider Buy Superstocks as most of his points actually make sense. It is a very decent introduction to this sort of growth stock trading strategy. I did not really cover everything about this book in this post and I think this book has touched on the important parts of being a successful investor.

I would love if he discuss more on the fundamental analysis and delve deeper into topics like sustainable earnings and cash flow growth. While he has a lot of technical case studies, the fundamental process has not been laid out.

I really appreciate his chapter on selling as I find it hard to grasp the timing to let go of both winning and losing trades.

I took great comfort and understanding with the promotion that you have to remove yourself from the markets and think for yourself. Something that has taken me a while to come to appreciate.

Overall, Insider Buy Superstock is a fun book to read. I cannot wait to practice his methods in the stock market to discover the next Superstock.

Cheers.

Leave a Reply