Mad Money

When these guys buy, Cramer does too

Clear sign to buy at the high

(Click for video linked to a searchable transcript of this Mad Money segment)

Jim Cramer doesn't often follow other investors into stocks. But there are exceptions.

And perhaps the most noteworthy exception is when Cramer sees meaningful insider buying.

That's not to say Cramer advocates following insiders all the time. He doesn't. In fact most of the time he says ignore them. "Sometimes insiders buy their stock because they want to give the impression of confidence. Other times they just want to create an illusion that they're doing better than they really are," Cramer said.

However, there are two circumstances when insider buying suggests to Cramer the stock could go a lot higher.

Hocus Focus Studio | E+ | Getty Images

Insider Buying at 52-Week High

"If you see insiders buying their stock when it's at its fifty-two week high, that is a clear sign to me that I want in," Cramer said.

That's because insiders are typically senior level managers who have an intimate understanding of the business and its future prospects. And when insiders buy at an all-time high, they're effectively saying despite the gains, business is so promising there should be more gains to come.

"There is nothing more arrogant nor telling than when an insider backs up the truck for his own stock when it's sitting at a fifty-two week high. Think about it. They're saying: 'yeah, we know we rock. Our stock has been en fuego, and we're so darned confident that it'll keep going higher that we're not waiting for a pullback. We're buying at the high.' Arrogant sure, but this is bankable hubris," Cramer said.

Insider Buying Heavily Shorted Stock

This second circumstance is a little trickier. It involves a large volume of insider buying of a stock that's otherwise heavily shorted. "It's almost like drawing a line in the sand," Cramer explained. "It's as if the executives are saying our stock goes this low, and no lower."

Read more from Mad Money with Jim Cramer
Cramer: This is confusing markets
Two private equity takeover targets
Workhorse stock generating big gains

That too, Cramer thinks is a buy signal, however he cautions that stocks with large short interest are not for the faint of heart. The subsequent price action can be volatile.

However, if you can stomach the ride, Cramer thinks buying in these circumstances will ultimately be rewarding. That's because shorts don't typically know as much about the business as the insiders who run it.

"And when shorts see big amounts of insider buying, they often think there's a big catalyst coming that's positive. In turn, a panic ripples across the short community and they cover, buying stock before that expected positive sends shares even higher.

Call Cramer: 1-800-743-CNBC

Questions for Cramer?

Questions, comments, suggestions for the "Mad Money" website?