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Myth-Busting Monday - Issue #387 from Wall St. Daily

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From: Wall Street Daily <wallstreetdaily@wallstreetdaily.com>
Date: Mon, Jan 28, 2013 at 7:41 PM
Subject: Myth-Busting Monday - Issue #387

You are receiving this email as a part of your free subscription to the Wall Street Daily e-letter. Click here to manage your subscription. Washington Insider Comes Out of the Shadows With Shocking Announcement He has been the secret man behind some of the biggest movements and most successful companies in America today. But for over a decade he has made a point to stay behind the scenes... That is, until now... Today, something so big has begun to happen in America that he's decided to come out of retirement and reveal his true identity for the first time on this scale. And in this controversial video, he'll tell you about the coming event that's going to change your life. Are Stock Buybacks Always Bullish for Share Prices? By LOUIS BASENESE, Chief Investment Strategist In the past few weeks, scientific-testing equipment company, Agilent (A), announced a $500-million stock buyback. Metal components and products maker, Precision Castparts (PCP), unveiled a $750-million stock repurchase program. Not to be outdone, khaki pants maker for the masses, Gap (GPS), announced a $1-billion repurchase program. Shareholders should be rejoicing, right? After all, stock buybacks imply that management believes their stock is cheap. And cheap is good. More significantly, conventional wisdom holds that stock buybacks reduce the total number of shares outstanding. And if you spread earnings over fewer shares - voila! - earnings per share increases, making the stock more valuable. The only problem? Conventional wisdom isn't always right. And in honor of Myth-Busting Monday, it's time to prove why stock buybacks aren't always bullish. Less Than Meets the Eye Riddle me this... If stock buybacks reduce shares outstanding, then how is it that (according to Dow Jones Indices) the 500 largest U.S. companies spent roughly $1 trillion on share purchases since 1998 - and yet the actual number of shares outstanding grew by 7% over that period? Or that, despite record periods of stock purchases, FactSet noted a 2.7% year-over-year quarterly increase in share counts for S&P 500 companies going back to 2005. The number crunchers must have made a mistake, right? Nope. It's just simple math. Although companies repurchased gobs of stock over each respective period, they ended up issuing more than they bought back. Some shares could have been issued to fund an acquisition, or to raise additional capital via a secondary offering. And more still could have been issued to provide shares for employees exercising stock option grants. Long story short, as Andrew Lapthorne, Head of Quantitative Analysis at Société Générale, says, "Share buybacks get misinterpreted. Many people see them as a return to shareholders." When, in actuality, many serve to prevent a dilution of shareholders. The takeaway? Before we blindly consider a buyback announcement a bullish indicator, we need to dig deeper. Here's why... Trust, But Verify Even if a company announces a buyback, it's not required to follow through. And a meaningful amount of executives renege (about 25% each year since 1985, according to Birinyi Associates data). Accordingly, we should verify management's track record of making good on their buyback promises. It's easy to do so at Morningstar.com. The site allows us to view five years' (or five quarters') worth of "weighted average shares outstanding." If that number is flat or rising, management is either not following through, or they're issuing a boatload of shares, too. However, if the number is consistently declining, then it is, indeed, a bullish indictor. How bullish? Studies vary, so let's go with the most conservative out of Credit Suisse Quantitative Research. It found that companies that consistently buy back shares return almost 2% more per year than companies with less regular or erratic buyback histories. Every extra percentage point in profits counts, so I'm not about to argue with an extra 2% per year. Candidly, though, I'd prefer more profits than that. Wouldn't you? The good news is, we can get it. We just need to add another indicator to the mix. A Better Bullish Indicator: Buybacks And Insider Buying Like I said before, a repurchase program signals that management thinks shares are undervalued. But if executives truly believe shares are cheap, wouldn't they start buying shares in their personal accounts, too? Turns out that if they do, shares perform even better. A study by Professor Shrikant Jategaonkar at Southern Illinois University at Edwardsville found that stocks subject to both repurchases and insider buying outperformed other stocks in the sample - by 29 percentage points over four years. Stocks subject to just repurchases only outperformed by about nine percentage points. That's 10 times better than just focusing on stock buybacks based on the Credit Suisse finding above. Bottom line: In theory, buybacks are good for investors. But in practice, we need to make sure management is actually reducing the share count before we treat it as a bullish indicator. For the best results, we should also insist on insider buying. Ahead of the tape, Louis Basenese If You Have Just $50... You may be able to turn it into windfall profits. Imagine making a string of tiny investments and watching it grow into extraordinary wealth. After today, you may not have to imagine any longer. Click here for details... Friday Charts: Real Estate Recovery, Rotten Apple and Dividends In this week's edition, we're sharing an ugly-looking Apple chart and the number one reason why real estate prices will keep rising. Two Timely Contrarian Trades Today I'm sharing new data on two contrarian ideas I previously put on your radar, to finally convince you to do something different from the majority before it's too late. Look Out for This Positive GDP Surprise Today I'm launching another semi-regular column, Think Contrarian, in which I'm going to routinely encourage you to flex your contrarian muscles. Three Companies More Innovative Than Apple The Seven Most Investable Technology Trends of 2013 Will CyrusOne Be the First "Hot IPO" of 2013? Three Currencies Ready for a HUGE Revaluation My Favorite (Contrarian) Commodity Trade For 2013 Shifting Smartphone Market Could Hurt Apple and Samsung Profits If you enjoy reading our no-nonsense, unbiased research at Wall Street Daily, feel free to share it with your family, friends and colleagues. Simply send them this link, so they can sign up for the TRUTH... for free, of course. Republish Wall Street Daily on your website or blog for free. LEARN HOW Have a question or want us to expose the truth? CONTACT US If you're having trouble viewing this email, you can access the article on the Wall Street Daily website. Twitter Facebook LinkedIn RSS You are receiving this e-mail as a part of your free subscription to the Wall Street Daily e-letter. Manage your subscription. 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Jorge U. Saguinsin
To "be the best, do your best, expect the best" always