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Tuesday, March 21, 2017 10:04:15 AM
<<< 5 companies on the radar of a top stock buyback expert >>>
By Mark Hulbert | March 21, 2017
Recent performance of the Buyback Letter has been good
Investing in companies that are buying back their shares remains a market-beating strategy.
That is welcome news given the bad press that buybacks have received in recent years. Companies that are repurchasing their shares have been widely criticized for sacrificing long-term growth for short-term gain. And though it’s impossible to say whether that criticism was the cause, there’s no doubt buyback activity has declined. According to FactSet, recent buyback activity among S&P SPX, +0.16% companies was the lowest it’s been in four years.
Does this mean that investors should stop favoring companies that are repurchasing their shares? Some argue that it does, on the grounds that engaging in buyback activity might now be a negative sign rather than a positive one. If so, that would represent a big shift from the situation that prevailed in prior decades, when the average company repurchasing its shares outperformed the market by a significant margin for several years following the announcement of its buyback program.
Others continue to recommend stockpicking strategies based on buybacks. As buyback activity becomes less widespread, they argue, those firms that still do engage in the activity must really be motivated to do so.
What’s been missing from this debate has been hard data. I at least partially rectified this lack by using my PC’s statistical program to analyze quarterly data on share repurchases since 2004 (courtesy of FactSet); the data reflected both the total dollar volume of share repurchases and the number of companies engaging in the practice.
I measured the correlation between the trends of those quarterly readings and the performance of various buyback strategies: The PowerShares BuyBack Achievers ETF PKW, +0.01% , the SPDR S&P 500 Buyback ETF SPYB, +0.00% , and the Buyback Letter, an investment advisory service published by David Fried.
I found no statistically significant correlations. Short-term trends of up to two years in repurchase activity had no detectable relationship — positive or negative — with the performance of any of these three buyback strategies. Though my statistical tests aren’t the final word on the matter, the burden of proof would appear to be on those who think that stockpickers shouldn’t continue to focus on companies’ repurchase activities.
That doesn’t mean that buyback strategies will continue to be as profitable as they were several decades ago, according to David Ikenberry, a finance professor at the University of Colorado and one of academia’s leading experts on corporate buybacks. In an interview, he pointed out that buyback activity has now become the rule rather than the exception. To the extent that the average company buys back its shares, it’s by definition more difficult for the average buyback company to outperform the overall market.
The implication is that you should use repurchase activity as the starting point of your analysis, not as your sole stockpicking criterion. This is what the Buyback Letter does, and helps to explain why it has beaten the overall market by a wide margin. (See chart, above.) Among the other factors he focuses on are several standard valuation ratios, as well as whether its insiders are buying or selling for their own portfolios.
It’s also worth noting that the Buyback Letter’s recent performance has not exhibited any signs of deteriorating. Over the last five years, according to my calculations, its average model portfolio has beaten the overall stock market by an annualized average of 1.5 percentage points. Over the prior five-year period, in contrast, it lagged by 1.0 percentage points per year. Though there is a lot of noise in the performance data, these two data points would certainly suggest that the newsletter’s strategy has become more profitable in recent years, not less.
The following five stocks are those that Fried currently recommends for aggressive traders:
· Bankrate RATE, -0.25%
· Houghton Mifflin Harcourt HMHC, +1.00%
· La Quinta Holdings LQ, +1.22%
· Rambus RMBS, +0.23%
· Sirius XM Holdings SIRI, +0.40%
http://www.marketwatch.com/story/5-companies-on-the-radar-of-a-top-stock-buyback-expert-2017-03-21
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By Mark Hulbert | March 21, 2017
Recent performance of the Buyback Letter has been good
Investing in companies that are buying back their shares remains a market-beating strategy.
That is welcome news given the bad press that buybacks have received in recent years. Companies that are repurchasing their shares have been widely criticized for sacrificing long-term growth for short-term gain. And though it’s impossible to say whether that criticism was the cause, there’s no doubt buyback activity has declined. According to FactSet, recent buyback activity among S&P SPX, +0.16% companies was the lowest it’s been in four years.
Does this mean that investors should stop favoring companies that are repurchasing their shares? Some argue that it does, on the grounds that engaging in buyback activity might now be a negative sign rather than a positive one. If so, that would represent a big shift from the situation that prevailed in prior decades, when the average company repurchasing its shares outperformed the market by a significant margin for several years following the announcement of its buyback program.
Others continue to recommend stockpicking strategies based on buybacks. As buyback activity becomes less widespread, they argue, those firms that still do engage in the activity must really be motivated to do so.
What’s been missing from this debate has been hard data. I at least partially rectified this lack by using my PC’s statistical program to analyze quarterly data on share repurchases since 2004 (courtesy of FactSet); the data reflected both the total dollar volume of share repurchases and the number of companies engaging in the practice.
I measured the correlation between the trends of those quarterly readings and the performance of various buyback strategies: The PowerShares BuyBack Achievers ETF PKW, +0.01% , the SPDR S&P 500 Buyback ETF SPYB, +0.00% , and the Buyback Letter, an investment advisory service published by David Fried.
I found no statistically significant correlations. Short-term trends of up to two years in repurchase activity had no detectable relationship — positive or negative — with the performance of any of these three buyback strategies. Though my statistical tests aren’t the final word on the matter, the burden of proof would appear to be on those who think that stockpickers shouldn’t continue to focus on companies’ repurchase activities.
That doesn’t mean that buyback strategies will continue to be as profitable as they were several decades ago, according to David Ikenberry, a finance professor at the University of Colorado and one of academia’s leading experts on corporate buybacks. In an interview, he pointed out that buyback activity has now become the rule rather than the exception. To the extent that the average company buys back its shares, it’s by definition more difficult for the average buyback company to outperform the overall market.
The implication is that you should use repurchase activity as the starting point of your analysis, not as your sole stockpicking criterion. This is what the Buyback Letter does, and helps to explain why it has beaten the overall market by a wide margin. (See chart, above.) Among the other factors he focuses on are several standard valuation ratios, as well as whether its insiders are buying or selling for their own portfolios.
It’s also worth noting that the Buyback Letter’s recent performance has not exhibited any signs of deteriorating. Over the last five years, according to my calculations, its average model portfolio has beaten the overall stock market by an annualized average of 1.5 percentage points. Over the prior five-year period, in contrast, it lagged by 1.0 percentage points per year. Though there is a lot of noise in the performance data, these two data points would certainly suggest that the newsletter’s strategy has become more profitable in recent years, not less.
The following five stocks are those that Fried currently recommends for aggressive traders:
· Bankrate RATE, -0.25%
· Houghton Mifflin Harcourt HMHC, +1.00%
· La Quinta Holdings LQ, +1.22%
· Rambus RMBS, +0.23%
· Sirius XM Holdings SIRI, +0.40%
http://www.marketwatch.com/story/5-companies-on-the-radar-of-a-top-stock-buyback-expert-2017-03-21
• DiscoverGold
Click on "In reply to", for Authors past commentaries
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