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The
Speculator
10 buyback
stocks worth buying now
Our impending
retirement inspires a trip down memory lane, where our
oft-criticized focus on theory and future returns delivers 10
stocks for the here and now.
By Victor
Niederhoffer and Laurel Kenner
Old speculators never retire -- they are
just engulfed by tidal waves, buried by earthquakes or swept
away by tornadoes. At least that’s the message we’ve been
hearing from readers across the world who are convinced that
the golden age of the 20th century, when investors made
returns on the order of 1.5 million percent a century, was an
unexpected constellation of forces around the globe that will
never be repeated.
With that thought in mind, pursued
by bearish thoughts on all sides and abuse from readers who
write over and over again that P/Es over 20 in the S&P
500 ($INX)
are much too high to make a bottom, that corporate malfeasance
is at such an unprecedented level that trust in stocks has
gone forever, and that risk is so great that pension funds
should place all their money in short-term Treasury bills or
long-term bonds yielding 3.5%; with the critics demanding that
the Spec Duo stop trying to deliver meals for a lifetime and
instead just say what stocks to buy right now for immediate
gain, we announce our retirement.
This
being the first of our final three columns, we wish to say
with penitent hearts, along with George Washington, that our
“usefulness was unequal to our zeal.” Moreover, our critics
were correct. Our quest was fruitless, and we were wrong to
try to fight the prevailing tide. We reach out to our readers
in a spirit of humility and request that they forgive us for
forecasting on Dec. 27,
2002, that the best trade of the new year would be to “buy
stocks as of year-end and sell bonds.” After all, the return
on stocks since then has only been 15% and the return for the
bond short has only been 6%.
In the same vein, may we
also beg pardon for writing
on April 10 that the supply-and-demand situation in the
stock market was extraordinarily favorable and that the best
estimate for stock returns in 2003 was 19%. It’s already
August, and stocks -- S&P futures, to be precise -- are
only up 14% for the year.
We also express our most
sincere regret for quantifying the Fed Model in our May 8,
2003, column (“Overvalued?
Stocks look cheap to us”) and concluding that based on
what happened over the last 40 years, “we would expect a 15%
return for the S&P 500 this year.” The year is already
two-thirds over, and we are still 1 percentage point
short.
Most of all, may we apologize for our tendency
to concentrate on the bigger picture -- the 1.5 million
percent-a-century returns documented in the book "Triumph of
the Optimists" by Elroy Dimson, Paul Marsh and Mike Staunton
-- rather than simply passing along the current
recommendations of mediocre money managers anxious to hype
stocks they recently bought and wished to unload, or that were
among the firmament of stocks that they did show profits on,
either long or short, and were using to generate buzz for
their fund or potential move to a new job.
10 stocks we like now
The time for
the Spec Duo to retire from writing “The Speculator” being
just three weeks from now, it appears to us proper that we
apprise you of our resolution to buy the following 10 stocks,
and to apologize for the gaps that have marred our performance
and which have so rightfully been brought to our attention by
the chronic bears who see no hope whatsoever for the
enterprise system.
We beg you at the same time to
understand that the purchase of these stocks has not been
undertaken without a strict regard to a complete enumeration
and study of every buyback involving an S&P 500 company
during the past three years, a review of all academic work on
the subject of buybacks, and an analysis of the importance
that the signaling behavior represented by a buyback
announcement has on the favorable anticipations that a
company’s board has for its prospects.
Please
understand that our purchases of individual stocks rather than
delivery of yet another unappreciated meal for a day -- like
our columns regarding CEO performance relative to college
degree (Aug. 14,
2003), lords on boards (April
17, 2003), golf handicap (Feb. 13,
2003), or the 150 other studies of a timeless nature we
have presented, represent no diminution of zeal for your
future interest, no deficiency of grateful respect for your
past kindnesses, and was in no way influenced by the numerous
death threats we received whenever we registered dissent from
the continuously bearish views of the Alan Abelsons and Warren
Buffetts of this world.
In short, we believe these
stocks are good purchases right now, if you believe the market
is going up. (But they might not be so good if you think the
market is going down . . . or if you think the gains have
already been discounted . . . or if you think a rally has
already been anticipated.)
| Latest buyback
announcements |
| Date |
Company |
Announcement date price
|
| 7/29/03 |
Concord
EFS (CE,
news,
msgs) |
13.85 |
| 7/29/03 |
Jones
Apparel (JNY,
news,
msgs) |
28.96 |
| 7/30/03 |
National
Semiconductor (NSM,
news,
msgs) |
20.76 |
| 7/30/03 |
United
Healthcare (UNH,
news,
msgs) |
54.75 |
| 7/31/03 |
Monsanto (MON,
news,
msgs) |
23 |
| 8/1/03 |
Cardinal
Healthcare (CAH,
news,
msgs) |
56.1 |
| 8/4/03 |
Andrew
Corp. (ANDW,
news,
msgs) |
9.98 |
| 8/5/03 |
Franklin
Resources (BEN,
news,
msgs) |
42.28 |
| 8/6/03 |
Deluxe
Corp. (DLX,
news,
msgs) |
43.32 |
| 8/14/03 |
United Parcel
Service (UPS,
news,
msgs) |
63.7 | |
Let
us note that these companies are the latest 10 among the
S&P 500 that have announced buybacks of their own shares.
As our critics have tirelessly pointed out, it is not
necessarily true that these companies will actually buy back
their shares, and it is true that many of them may be
announcing the buybacks only to generate investor enthusiasm
for their companies or, worse yet, to offset the share
dilution caused by options issuance or active acquisition
policies. All we can do is point out that we will be buying
these stocks ourselves on the grounds that academic studies
have shown over and over again that companies that announce
buybacks perform 5 to 10 percentage points better than the
market. The practical money-management experience and thorough
academic work of Theo Vermaelen, with other scholars and his
own students at INSEAD in Fontainebleu, France, are
representative.
As we pointed out in our
column of April 18, 2002, our own study of 224 companies
that announced buybacks in 2000 and the first three months of
2001 had superior performance of 30 percentage points a year.
We have updated our study again for all the companies that
announced buybacks in 2002, and find that these companies
outperformed the S&P 500 by 6 percentage points.
| S&P 500 members
buying back their own stock (summary of performance
relative to their index) |
| Year |
Companies announcing
buybacks |
Average price change (%)
through year-end* |
S&P 500 (% chg) |
| 2002 |
124 |
0% |
-6% |
| 2003* |
89 |
9% |
7% | | * 2003 data through Aug. 5
Source:
Niederhoffer Management, Bloomberg
In reviewing
the performance of S&P 500 companies that announced
buybacks in 2002, we note that they have performed 6
percentage points better than the market through our Aug. 5
research deadline. Of the 124 companies, 52% of them
registered a rise and 60 % of them beat the market during this
period. While we are sensible of the defects of this study, we
fervently believe that this is a rather definitive update of
the buyback results, and that based on the standard deviations
involved it is 99.999% likely that the true difference between
the performance of companies from this universe and the market
itself during this period was between 12 percentage points and
0.
In reviewing these results, we aren't conscious of
intentional error. But we are nevertheless too sensible of the
defects of studies of this nature, and the many errors that we
are prone to in this and other areas, not to think it probable
that eventually the cycles will change. Until they do change,
we fervently believe that the buyback stocks represent one of
the best hopes that our readers may have to select the finest
ships in a flotilla with the wind at its back. In the
discharge of our official duties, we shall update these
results on our Web site.
With
this in mind, we dare to hope that after 600 consecutive
columns for this and our previous sites, wherein we have
dedicated our service to our readers with upright zeal, that
our readers, especially the trend followers, chronic bears and
value boys, will consign our faults to oblivion and not think
too harshly of us as we contemplate the mansion of
rest.
Final
note
Inspired by thoughts of our impending
departure, we sent a missive to the Triumphal Three -- Dimson,
Marsh and Staunton -- opining that the world’s stock markets
would see gains in the 21st century comparable to those of the
20th. “Who knows what causes stocks to move over a century?”
we wrote. “Certainly expectations of technology breakthroughs,
liquidity, information, demographic variables, interest rates,
and diversification play a role. The best working hypothesis
is that stock returns have nothing to do with reported
dividend growth and payouts, but have everything to do with
the requirements of entrepreneurs for risk capital, the return
they can make on investments, and the requirements of
investors who invest at risk. The best working hypothesis for
the next 100 years is that investors will achieve what they
require a priori for their risky investments, which has
always been a solid 10%.” Their highly critical response and a
précis of their own more profound thinking is covered on our
site, along
with a complete enumeration of our buyback
study.
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 Fund data provided
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reserved.
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