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TAG | New York Stock Exchange
12
Share Buybacks: A Buy Signal You Can’t Ignore
0 Comments | Posted by Alexander Green in Alexander Green
Share Buybacks: A Buy Signal You Can’t Ignore
by Alexander Green, Investment U Chief Investment Strategist
Monday, March 12, 2012: Issue #1727
Share buybacks increased by 46% in 2011. Has there ever been a more bullish indicator?
There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…
But you shouldn’t overlook another excellent indicator: share buybacks.
According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.
Is this a good thing? Absolutely…
Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxable dividends.
So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.
Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)
But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.
More Buybacks Ahead
Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM), Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).
There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise, or cash flow decreases, a repurchase program may never get completed.
The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.
But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips (NYSE: COP).
Having Your Cake and Eating it, Too…
Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree…
But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.
Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).
These are the kind of companies that should handily outperform the market in the months ahead.
Good Investing,
Alexander Green
9
The U.S. Aging Crisis: A Threat to Stock Market Prices?
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The U.S. Aging Crisis: A Threat to Stock Market Prices?
by Alexander Green, Investment U Chief Investment Strategist
Friday, March 9, 2012: Issue #1726
Robert Arnott claims that the U.S. aging crisis is a threat to future stock market prices. But do the numbers add up?
There’s a new scaremonger in town. And his name is Robert D. Arnott, a portfolio manager, asset-manager executive and Chairman of Research Affiliates in Newport Beach, California.
Mr. Arnott has a simple thesis. Over the next 10 years, the ratio of retirees to active workers will balloon. Retirees, of course, must eventually sell their stocks to support themselves. But there will be fewer young investors around to buy them. Ergo, returns on stocks over the next 10 to 20 years will be anemic.
If this sounds simplistic, congratulations. You probably have a brain and at least a modicum of common sense. This type of “stock market analysis” is really no analysis at all. More to the point, it doesn’t work. Just ask failed economic futurist Harry Dent, whom I’ve written about before.
While it’s inevitable that there will be 10 new senior citizens for each new working-age citizen over the next decade, that in itself doesn’t portend paltry equity returns.
For starters, let’s look at what’s happening to the world population as a whole. There are currently seven billion human beings living on the planet. At the current growth rate, that total is likely to hit eight billion within a decade.
Now, if you believe that investors in China, India, Brazil and other countries will have no interest in buying companies like Procter & Gamble (NYSE: PG), ExxonMobil (NYSE: XOM), or Coca-Cola (NYSE: KO) in the future, no matter how inexpensively they’re priced, I guess you might put some credence in Mr. Arnott’s thesis.
But that’s highly unlikely. Citizens of capitalist countries are getting wealthier and better educated all the time. And the world is becoming more integrated. Would you really have a problem buying shares of Toyota (NYSE: TM), British Petroleum (NYSE: BP) or Nestle (OTC: NSRGY.PK) if they were bargains?
Of course not, regardless of the demographic trends in Japan, Britain, or Switzerland.
Mr. Arnott doesn’t just miss the big picture about the future, however. He also misinterprets the past. In a recent Wall Street Journal interview, for example, he talks about the collapse of Japan’s stock market over the last 23 years and blames it on the country’s aging population.
I have a better explanation. When the Nikkei 225, Japan’s leading stock market benchmark, climbed to nearly 40,000 in 1989, it was a bubble of epic proportions. Many stocks traded at more than 100 times earnings. And real estate was even more absurd. Just the 1.32 square miles that encompassed the Imperial Palace in Tokyo were valued at more than all the real estate in California combined.
Now that’s nuts. Crazier still were the Japanese banks that loaned money against these wildly inflated property values. This led to a protracted banking crisis that Japan’s political class refused to clean up.
To imagine that the two deflationary decades that followed this mania were the result of an aging population is like blaming this year’s warm winter on your aching big toe. Yet Arnott insists we should hunker down since “[Japan’s] demography is 10 years ahead of ours.”
Want to know what will really determine stock prices in the future? Earnings. I challenge you to look back through history and find even one publicly traded company that increased its profits quarter after quarter, year after year, and the stock didn’t tag along.
Perhaps our aging retirees will buy less in the future and contribute less to U.S. corporate profits. But there are billions of consumers around the world hungering for homes, computers, cars, phones, health insurance, credit cards, pharmaceuticals and golf clubs. They’re likely to be an engine of world economic growth – and rising U.S. corporate profits – for decades to come.
Don’t let anyone scare you otherwise.
Good Investing,
Alexander Green
24
The Great Minds of the Market: Charles Dow
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The Great Minds of the Market: Charles Dow
by Alexander Green, Investment U Chief Investment Strategist
Monday, January 23, 2012: Issue #1692
This week I’m beginning a series about the great men and women – often unknown – who shaped the modern investment landscape.
Why should you care about these individuals, especially since many of them are dead? Because Sir Francis Bacon was right: Knowledge is power. This is especially true in the financial markets. And, as you’re about to learn, the type of knowledge you accumulate is likely to be a primary determinant of your success as an investor.
So let’s kick things off today with a man whose name is legendary on Wall Street:
Charles Dow.
Dow is a significant figure in the annals of financial history for two reasons. He created the first financial bible, The Wall Street Journal, and the first market barometer, the Dow Jones Industrial Average. In doing so, he revolutionized the way we talk about the financial markets.
(By the way, Charles Dow is sometimes credited with creating Dow Theory, too. This is not so. The market-timing strategy was extracted fom his WSJ editorials 20 years after his death by a market technician named William P. Hamilton.)
Charles Dow founded Dow Jones and Company with a partner in New York in 1882. At the time, most financial data was simply outdated news and unreliable gossip. But Dow Jones and Company published daily financial updates in a two-page newspaper called the Customers’ Afternoon Letter – The Wall Street Journal’s predecessor.
It was in the Letter that Dow first published his average, initially comprised of 14 companies – 12 railroads and two industrials.
Today the Dow consists of 30 large companies meant to reflect the U.S. economy. (There are, however, few holdings in heavy industry – and no railroads!) The average, price-weighted to compensate for stock splits and other adjustments, is the most closely watched benchmark for tracking stock market activity.
Yet the Dow is actually a poor representation of the broad market. If you’re looking to capture its performance, you’re much better off owning the better-diversified S&P 500 (NYSE: SPY) or the Wilshire 5000 (NYSE: TMW).
The most important thing we can learn from Charles Dow is the primacy of financial information. More than a hundred years ago, he realized that it was essential for investors to have not just opinions, rumors and forecasts, but verifiable facts. You simply must be well informed and up-to-date beyond this week’s headlines.
I’ve known investors who will buy a stock and not keep abreast of how the company is performing relative to its competitors, the direction of sales, or even the growth in profits. This is an act of faith, not rational investing.
Charles Dow created a daily business publication to give investors essential facts. Today, of course, you can get your financial news in real time off the internet. But the important data isn’t today’s government statistics or a new pronouncement by Ben Bernanke, but rather the hard numbers that tell us how individual businesses are performing.
The kind of investment news you accumulate is crucial. Listen to economic analysts, for example, and you’ll hear gloom and doom about high unemployment, the housing slump, consumer confidence, or problems in the Eurozone.
Listen to market analysts and you’ll hear trivia about short-term trends, changes in volume, support and resistance levels, and so on. This is not the type of information that will not make you rich.
But listen to business analysts today and you’ll hear plenty about corporate innovations, new medicines and technologies, and, not incidentally, all-time record corporate profits.
Is it any great surprise that investors who follow business news are making a lot of money in this market and those who listen to economic and market forecasts are sitting on their hands and earning miniscule returns?
Charles Dow knew better. And you should, too.
Good Investing,
Alexander Green
by Alexander Green, Investment U’s Chief Investment Strategist
Monday, April 25, 2011: Issue #1498
“Buy Japan now?” a friend asked recently. “Are you nuts?”
His sentiment is understandable. Aside from the unfathomable human suffering in Japan over the past several weeks, there have been enormous economic setbacks as well.
Sendai, the biggest port in northeast Japan and a major exporter of auto parts, machinery and marine products, was virtually wiped off the map. Half a dozen oil refineries in the same area, representing a third of the nation’s entire refining capacity, are shut down. Roads, bridges, railways and other major infrastructure have been destroyed. And the Japanese economy – already limping along for most of the past two decades – is also beset with the world’s highest public debt relative to GDP (225%) and a rapidly aging population.
Why would anyone want to invest here?
In my experience, those words accompany virtually every great buying situation. But it takes more than just a lack of interest to create a true contrarian opportunity. Both sentiment and valuations have to be at an extreme.
And that’s certainly the case here…
Japanese Stock Prices Are Less Than Book Value
The average Japanese stock is selling for less than 14 times its annual profit. That’s cheap, and Japanese accounting methods also tend to understate earnings. An even better indicator is found in book values (assets minus liabilities). Stocks around the world (including the United States, Europe and China) currently sell for approximately two times book value. In Japan, they sell for less than book value. By this measure, U.S. stocks are twice as expensive as Japanese stocks.
What will turn Japan’s market around? For starters, the enormous rebuilding that will be required over the next few years. Devastated areas account for seven percent of Japan’s economy and a substantial portion of its land mass. A lot of businesses will receive substantial contracts as a result of the catastrophe.
History shows that Japan is adept at rebounding from catastrophe. (Take World War II or the 1995 Kobe earthquake as examples.) And when Tokyo enters a bull market, it can look like the Silver Spurs Rodeo. For example, if you invested $10,000 in the S&P 500 in 1970, two decades later it would have been worth more than $76,000. Not bad.
But the same amount invested in the Nikkei 225 would have turned into more than $600,000.
How to Buy into Japan’s Advanced Economic Power
Although China’s economy has now eclipsed Japan’s in size, Japan is still Asia’s most advanced economic power, with world-leading technologies and an unmatched infrastructure.
The cost of doing business in Japan has decreased dramatically in recent years, as well. Land prices, office rents and labor costs have come way down. So have taxes and tariffs. And the government has instituted serious banking reforms.
The nation also sits on a mountain of personal financial assets – more than $100,000 for every man, woman and child. After a decade of negative stock market returns, most of this capital is sitting in low-yielding bank deposits. Even a small fraction of these assets returning to the equity market could give it a serious jolt.
So how do you play a rebound? Consider a Japan ETF or some of the country’s unloved blue chips like Toyota (NYSE: TM), Mitsubishi Financial (NYSE: MTU), Canon (NYSE: CAJ), or NTT DOCOMO (NYSE: DCM).
The healing there will take time, of course. But just as the U.S. stock market rebounded from the recent financial crisis quicker than almost anyone expected, things in Japan may look dramatically different in six to 12 months from now.
Of course, very few people believe that. But, in one sense, that’s a good thing. Negative sentiment and low valuations are the defining characteristics of contrarian investing.
Bottom fishermen, cast your nets.
Good investing,
Alexander Green
23
How The Oxford Club Beat The Financial Crisis… And What We See Now
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How The Oxford Club Beat The Financial Crisis… And What We See Now
by Alexander Green, Investment U’s Chief Investment Strategist
Thursday, September 23, 2010: Issue #1351
Investment forecasting is an inherently humbling business.
No matter how many good calls you make, there is always the possibility of getting it wrong the next time. Unexpected events happen. Markets turn on a dime. And an investment advisor often learns – in the cold reality of hindsight – that just when he felt like sticking his chest out he should have been covering his privates instead.
Yet there is a time for celebration too. And there is no denying that The Oxford Club and its members just came through the biggest financial crisis and the nastiest economic downturn in modern history with flying colors.
Perhaps the most surprising part is this: We can’t claim we foresaw how it would all unfold. If we had, we might have told readers to plow their money into bonds before the stock market meltdown and then switch back into stocks at the very bottom.
Unfortunately, there’s only one type of investor who does this consistently. You may have heard of them. They’re called liars.
So how did we succeed when tens of millions of investors stumbled?
Guesswork, Forecasting, Market Timing: Three Things You DON’T Need to Invest Successfully
Our investment system is built on the fundamental premise that to a large extent, the future is unknowable. Seasoned investors agree but then insist, “But of course you have to guess.”
No, you don’t.
We’ve taken the guesswork out of investing. For long-term investors, we use a proprietary asset allocation model, rebalance annually and keep taxes and investment costs to the absolute minimum.
No economic forecasting or market timing required.
Our short-term traders focus on buying great companies that are likely to beat consensus earnings estimates by a wide margin and run trailing stops behind them to protect both their principal and their profits.
How has this worked? You be the judge…
How We Notched a 28% Average Return Amid the Chaos of 2008
2008 was one of the worst years on record for the S&P 500. It posted a return of -38.5%. That caused us to stop out of 45 stocks in our Oxford Trading Portfolio. Here is the entire list. Nothing has been omitted. Although we took some lumps like everyone else that year, the average return on our closed positions was 28.6%.
With the financial crisis unfolding, we set aside our market neutral position. Why? Because you shouldn’t be afraid to aggressively buy or sell when market sentiment and valuations reach extremes. (That means either extreme optimism and sky-high valuations or extreme pessimism and rock-bottom valuations.)
Going into 2009, most investors were scared out of their pants. Stock market players were cashing in their chips. Bank depositors were running down to their local branch to withdraw their savings. The world seemed on the edge of financial collapse. And so did the markets.
Yet the headline on our annual forecast issue was: “Our No. 1 Prediction for 2009: Economic Disaster AND a Soaring Stock Market.”
Bear in mind, almost no one was saying this at the time. But that’s exactly what investors got. While the economic slump only deepened in 2009, the S&P 500 came roaring back – and our recommended stocks outperformed it handily.
If the Market Gives You Lemons… Don’t Get Sour, Just Suck Up Profits
This year we’ve maintained our optimistic stance on equities and have been rewarded with even more big profits.
While the S&P is only up 4% year-to-date, we’ve already realized gains of 229% on La-Z-Boy (NYSE: LZB), 103% on Tiffany & Co. (NYSE: TIF) and 54.7% on Emergency Medical Services (NYSE: EMS).
We’re also sitting on current gains of 321% on the Vanguard Emerging Markets Index (VEIEX), 299% on the Templeton Dragon Fund (NYSE: TDF) and 94% in Discovery Communications (Nasdaq: DISCA).
Yet over the past year and a half, at investment conferences around the world, I’ve heard almost nothing but talk of stagnation, double-dip recession and gallons of gloom and doom.
This week the National Bureau of Economic Research reported that the longest and most severe recession since the Great Depression is over. That doesn’t mean we’re out of the woods yet. We’re likely to have high unemployment and low economic growth for many months – and perhaps the next three years.
But we’re fully prepared for that, too. In fact, we’re already capitalizing on it. Perhaps that’s why the independent Hulbert Financial Digest ranks our Oxford Club Communiqué among the top investment letters in the nation for 10-year performance.
In short, we’ve taken the lemons the market handed out during the financial crisis and turned it into a Tom Collins with a fruit slice and a maraschino cherry.
If this sounds a little brash, I apologize. But we’ve enjoyed enormous success during the toughest economic period in more than 80 years.
And as Dizzy Dean famously said: “It ain’t bragging if you can do it.”
And if you want to do it, too, consider joining The Oxford Club and we’ll show you exactly how in our five model portfolios.
Good investing,
Alexander Green
30
Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
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Jeremy Siegel: Treasury Bonds Today Are a Sucker Bet
by Alexander Green, Chief Investment Strategist
Monday, August 30, 2010: Issue #1334
The investment advisory industry is full of gurus – and various charlatans – claiming that they made incredible stock market calls.
But Wharton Professor Dr. Jeremy Siegel made perhaps the greatest call of all time at the right moment and for the right reasons. Those who listened to him saved themselves many thousands of dollars – and untold agony.
Now Dr. Siegel is making another bold prediction. You can only ignore it at your peril. Here’s why…
Siegel Shocks the Market
On March 13, 2000, The Wall Street Journal ran an op-ed piece from Dr. Siegel entitled “Big-Cap Stocks Are a Sucker Bet.” The column shocked the investment community.
Here was the man, author of the investment classic Stocks for the Long Run and who provided the intellectual underpinnings of the greatest bull market in history, claiming that the greatest stock market darlings weren’t just overvalued. They were a “sucker bet.”
Siegel focused on the 33 largest firms based on market capitalization – those with values greater than $85 billion. Of these, 18 were technology stocks. He noted that their market-weighted P/E equaled 126. What’s more, he pointed out that half of the large-cap technology stocks had P/Es over 100. For these stocks, the market-weighted P/E was 208.
These prices were totally unjustifiable. There was no way that these companies could grow fast enough to support such insane valuations.
Are You Heeding Siegel’s Current Warning?
That month, the Nasdaq – home to these tech giants – hit its all-time high of 5,132. From there, it imploded. Many of the stocks he singled out in the column – like Yahoo! (Nasdaq: YHOO) and JDS Uniphase (Nasdaq: JDSU) – plunged over 99%.
Even today – more than 10 years later – the Nasdaq is 60% below its high.
It’s great when a knowledgeable analyst like this rings a clear warning bell at the top. So understand that he’s doing it again today.
Earlier this month, he wrote another Wall Street Journal op-ed piece. This one is called “The Great American Bond Bubble.”
Siegel says: “What is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.”
As a result, they’re plowing money into Treasuries and Treasury mutual funds.
This will almost certainly end badly.
Unless we have a full-blown deflationary depression, these bonds are a horrible bet, offering minuscule yields and huge downside risk. Many investors don’t realize how badly they can get clobbered in super-safe Treasuries when the bond market turns down. (And those holding leveraged bond funds could see 40% or more of their principal vanish in a matter of months.)
As Siegel concludes: “Those who are now crowding into bonds and bond funds are courting disaster… The possibility of substantial capital losses looms large.”
What does Siegel propose that income investors hold instead?
Don’t Be a Sucker: Invest in This Asset Class Instead
Large-cap dividend stocks.
He points out that the 10 largest dividend payers in the United States are:
AT&T (NYSE: T)
Exxon Mobil (NYSE: XOM)
Chevron (NYSE: CVX)
Procter & Gamble (NYSE: PG)
Johnson & Johnson (NYSE: JNJ)
Verizon (NYSE: VZ)
Phillip Morris (NYSE: PM)
Pfizer (NYSE: PFE)
General Electric (NYSE: GE)
Merck (NYSE: MRK)
And together…
- They sport an average dividend yield of 4%, substantially more than what 10-year Treasuries are paying.
- Their average P/E ratio is 11.7 versus 13 for the S&P 500.
- Aside from the mountain of cash they’re sitting on, their prospective earnings will cover their dividends by more than 2 to 1.
Despite fears of another stock market dip, income investors are wise to switch from Treasuries to high-dividend stocks. It might not feel like the right thing to do, but neither did buying stocks at the market low 17 months ago.
In short, I couldn’t agree with Dr. Siegel more. Treasury bonds today are a sucker bet.
Good investing,
Alexander Green
