Stock BuybacksWritten by Ophir Gottlieb, 12-15-2015
Stock repurchases have become an overwhelming part of the financial strategy firms are taking to invest excess cash and it has also become a metric that billionaire hedge fund managers are using to separate themselves from the rest of us.
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When a firm purchases its own stock, it can be seen in several ways:
1. The company feels its stock is undervalued and believes a solid use of its cash is to actually directly invest back into the company's shares.
2. The company wants to raise earnings per share (EPS) by lowering the number of shares that are outstanding. That means in the equation earnings/shares, the 'shares' are declining, and EPS actually rises even if earnings do not.
3. A combination of the two.
Here are the largest companies in technology, ranked by their stock repurchases in the trailing-twelve-months.
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For some firms, like Apple, which have so much free cash there is literally nothing else to do after investing in R&D and paying out dividends, a stock buyback can make sense. Other firms, like IBM, are buying back stock by issuing debt in a low interest rate environment, even as earnings are declining; this is generally considered semi earnings manipulation (legal).
We can see Apple is pouring money into stock buy backs for years at unprecedented levels and the average price has been ~$90. With the stock trading at $112, so far this has been a wealth generating strategy for the firm. In the trailing-twelve-months, Apple has bought back over $35 billion in stock.
Coming in well below Apple are MSFT (over $15 billion), QCOM (over $10 billion), ORCL (just below $10 billion) and INTC (just below $8 billion).
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We can also create the same chart that includes all sectors. Here is the data presented below.
Now we can see the largest bank buybacks (WFC), biotech (GILD), Oil & Gas (XOM) andmedia (DIS).
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WHY THIS MATTERS
The top analysts, asset managers and hedge fund managers are keenly aware of the trends in stock buybacks for the firms they either invest in, or are considering investing in as the practice does raise EPS and can act as a sort of floor for a stock drop.
It's not an exact science, and it's hardly the end all be all metric, but if we're not using this data, then we're trading against people that simply have more information then we do. That is a wealth losing strategy.
Data like this but even deeper has, until now, been kept away from retail investors. You can get it for a six-figure data feed or a $2,000 a month Bloomberg terminal. The information asymmetry that exists between pros and non-pros has transferred massive wealth to the top 1% from the rest of us. That information asymmetry is no longer acceptable to us.
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