{"id":37267,"date":"2013-04-03T01:53:22","date_gmt":"2013-04-03T05:53:22","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37267"},"modified":"2013-04-03T01:53:22","modified_gmt":"2013-04-03T05:53:22","slug":"dont-fall-into-these-10-buyback-traps","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/03\/dont-fall-into-these-10-buyback-traps\/","title":{"rendered":"Don\u2019t Fall into These 10 Buyback Traps"},"content":{"rendered":"

By WallStreetDaily.com<\/u><\/a> <\/p>\n

This data is hot off the presses…<\/p>\n

In the fourth quarter, S&P 500 companies repurchased a staggering $99.1 billion of their own stock. That’s a 13.2% increase over the $87.6 billion spent in the fourth quarter of 2011.<\/p>\n

Talk about bullish news, right?<\/p>\n

After all, stock buybacks are supposed to imply that management believes the stock is cheap. And the additional buying activity serves as a catalyst for a rally.<\/p>\n

At least, that’s what conventional wisdom dictates. And the financial media is certainly buying into that theory…<\/p>\n

Take the well-known industry rag, InvestmentNews<\/em>, for instance. It’s out trumpeting the companies with the biggest buyback programs as “Buyback Kings.”<\/p>\n

The implication is that these companies are also compelling “Buys” for investors.<\/p>\n

My take? Not so fast!<\/p>\n

In fact, treat this news as if it were an April Fools’ prank.<\/p>\n

As I revealed in late January<\/a>, stock buybacks aren’t always<\/em> bullish.<\/p>\n

Before we can make that determination, we need to ensure that management is actually reducing the share count – and, in turn, increasing earnings per share.<\/p>\n

So let’s do that today. Because the last thing I want is for you to unknowingly fall into any of the buyback traps lurking in the market.<\/p>\n

Not As Bullish As You Think<\/strong><\/b><\/p>\n

In the fourth quarter, a total of 317 companies in the S&P 500 repurchased shares on the open market. That works out to more than 60% of the Index, which sounds impressive and extremely bullish.<\/p>\n

Until we dig into the data, that is…<\/p>\n

As S&P’s Howard Silverblatt reveals, “Most of the companies have shied away from share count reduction.”<\/p>\n

Specifically, only 98 of the 317 companies actually reduced the number of shares outstanding. And only 36 did so by a meaningful amount (more than 1%).<\/p>\n

Which means a total of 219 companies that repurchased stock during the quarter actually saw their share counts remain the same – or even rise<\/em>.<\/p>\n

Or, more simply, 219 companies flashed false “Buy” signals.<\/p>\n

Now do you understand why we can’t blindly treat buybacks as bullish?<\/p>\n

In this case, the headlines suggest that a majority of companies reduced their share count, which would be a wildly<\/em> bullish indicator.<\/p>\n

But only a minority actually did (19.6%), which is only a moderately<\/em> bullish indicator.<\/p>\n

Bigger Isn’t Always Better<\/strong><\/b><\/p>\n

If we focus simply on the 10 biggest buyers of their own stock, the bullish readings come up short, too.<\/p>\n

\"\"<\/p>\n

As you can see, every company spent more than $1.5 billion on repurchases.<\/p>\n

Apple <\/strong>(AAPL<\/a>) surprisingly made the list, too. I say “surprisingly” because it seldom repurchases its own stock. (The last time was in the second quarter of 2006.)<\/p>\n

Despite its $1.95 billion in repurchases in the fourth quarter, though, the total number of shares outstanding increased<\/em>. So if people say you should buy Apple because management is purchasing the stock, tell them to get a clue!<\/p>\n

In truth, only one company in the top 10 purchased enough stock to reduce shares outstanding by a percentage that I’d consider extremely bullish. And that’s AT&T<\/strong> (T<\/a>). It spent over $4 billion on buybacks and reduced its share count by more than 3%.<\/p>\n

While that’s bullish, you’ll recall that legitimate buyback activity – accompanied by insider buying – is even more bullish. After all, if management thinks shares are truly undervalued, they should be buying them in their personal accounts, too.<\/p>\n

And go figure – such stocks outperform the market by as much as 29 percentage points.<\/p>\n

So if we also take insider buying into consideration, AT&T is (once again) the only company that comes close to being a compelling investment.<\/p>\n

Add it all up – tacking on an attractive yield, to boot – and it seems like AT&T is currently a strong “Buy” right?<\/p>\n

Not so much!<\/p>\n

I say that simply because the stock is getting expensive. The current P\/E ratio of 30 represents an 85% premium to the average stock in the S&P 500 and <\/em>a 38% premium to AT&T’s five-year average P\/E ratio.<\/p>\n

Bottom line: None of the “Buyback Kings” represent irresistible opportunities. Sorry to disappoint. But investing isn’t as easy as looking at a top 10 list and buying blindly. No matter how bullish an indicator is supposed to be.<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

Article By WallStreetDaily.com<\/u><\/a><\/p>\n

Original Article: Don\u2019t Fall into These 10 Buyback Traps<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com This data is hot off the presses… In the fourth quarter, S&P 500 companies repurchased a staggering $99.1 billion of their own stock. That’s a 13.2% increase over the $87.6 billion spent in the fourth quarter of 2011. Talk about bullish news, right? After all, stock buybacks are supposed to imply that management … <\/p>\n

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