|
 |
| Price |
22.250 |
|
| Change |
+0.050 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
|
 |
| Price |
64.420 |
|
| Change |
+1.900 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
|
 |
| Price |
72.080 |
|
| Change |
+1.120 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
|
 |
| Price |
64.290 |
|
| Change |
-0.660 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
| Details
|
|
 |
| Price |
53.790 |
|
| Change |
+0.720 |
| Research
Wizard
Add
to MSN Stock List
Message
Board
Related Resources
Build a
screen of real estate stocks with our Stock
Screener
What stocks
are hot or not?
What
are the top-performing
industries?
The Speculator
Recent articles:
• A good news/bad news
book for optimists, 4/11/2002
• 10 rules to squash
the market competition, 4/4/2002
• Fear, greed and other
reasons to ignore P/Es, 3/28/2002
More...
|
|
 |
| sponsored
by: | |
The Speculator
Buy companies buying their own
stock
We
crunched the numbers and found that companies that repurchase their
own stock almost always go on to smash the S&P averages. Here's
why -- and 13 stocks you may want to get started
with.
By Victor
Niederhoffer and Laurel Kenner
Just 13 companies enshrined in the S&P 500
index have announced plans to repurchase their shares so far in 2002
-- the slowest pace for corporate stock buybacks in half a
decade.
But if our research into the fate of buybacks in 2000
and 2001 is correct, they are going to be a very lucky 13.
| 2002 Buyback Announcements
|
| Company |
Symbol |
Date |
# shares (mill.) |
Total outstanding (mill.) |
| Aflac |
AFL |
12-Feb |
25 |
518 |
| BB and T |
BBT |
27-Feb |
40 |
461 |
| Biomet |
BMET |
26-Mar |
30 |
268 |
| Bear Stearns |
BSC |
8-Jan |
20 |
100 |
| Health Mgt Assoc |
HMA |
21-Feb |
5 |
242 |
| Johnson & Johnson |
JNJ |
13-Feb |
80 |
3,047 |
| Lehman Bros |
LEH |
25-Jan |
78 |
244 |
| Lexmark |
LXK |
21-Feb |
4 |
129 |
| MGIC Invest Co |
MTG |
24-Jan |
5.5 |
106 |
| Royal Dutch Petrol |
RD |
7-Feb |
1.5 |
2,127 |
| Tenet Healthcare |
THC |
14-Feb |
10 |
326 | |
Before
we explain our view, let us point out that there is every reason in
the world to be bullish about a company when it announces that it
will repurchase its shares. Academics have identified at least 30 of
them, usually divided into the following classes.
- Signaling. If a board authorizes the purchase of its
shares, it would likely be signaling to its shareholders that it
feels its stock is undervalued.
- Cash flow. Corporations these days are beset by
skeptics who fret they will use their cash to build castles in the
sky, such as skyscrapers or, in the case of Enron, create a horn
of plenty for employees such as free Starbucks coffee (see our
article of 12/13/2001, “On
Wall Street, pride signals a fall.”) Distributing wealth to
stockholders by reducing available shares diminishes the potential
for waste.
- Better income ratios. The reduced number of shares,
other things being equal, will improve earnings per share and
return on equity.
- Substitutes for dividends. In recent years, the amount
of buybacks has been running at or above the level of dividends.
There are tax reasons at both the corporate and stockholder level
that buybacks are preferable. Also, a one-time stock repurchase
does not permanently increase dividends, so that if a mishap
occurs in the future, there is no reputational disadvantage to
their elimination.
- Lack of sufficient investment opportunities: When a
company perceives that the rate of return in their own business is
less than that which their stockholders could achieve, they should
prudently distribute the money to shareholders.
The classic
study on this last subject was published in 1995 in the Journal of
Financial Economics by David Ikenberry, a professor at Rice
University. He concluded that companies that buy back their own
shares perform some 4% a year better than the averages. The
differences rise to some 15% a year for value stocks. His studies
have set off a cottage industry in academic studies. Confirming
evidence has been provided for companies in India, Australia,
England and Canada for various selected years and
samples.
New data has cast these conclusions into doubt,
however. For example, studies by two professors at Curtin University
in Australia, John Evans and James Gentry, have concluded that the
performance of companies that repurchase shares is worse than
average. The effect is particularly pronounced for small companies.
The idea here is that the small companies hurt their cash flow by
repurchasing shares. If they are willing to do it, then they must be
running out of investment opportunities.
A
brilliant reconciliation of these results has been achieved by
Edward Zajac and James Westphal at Northwestern University. They
point out that regime shifts occur that make repurchase strategies
good in one period and bad in another. In the1980s, they suggest,
the dominant ideology was to honestly signal an intention to get
good returns to shareholders and not to waste assets. But in the
1990s, many companies used repurchases to create a façade of
stockholder awareness, with not much intention of actually
completing the repurchase.
The situation is complicated by
the biased nature of the samples that have been used. Many of the
studies use data published in newspaper indexes. These data are then
cross-referenced with financial data files -- with incomplete
records thrown out.
The situation is unfortunately yet
another example of the use of spurious correlations and the
selective eyeballing of data that often riddles academic research.
It is best illustrated by the documented fact that there is
a high observed correlation between the number of storks and human
births in Germany.
An ingenious explanation that won the
1998 Purdue University Spurious Correlation Contest underscores the
pitfalls. The study is based on the observed high correlation
between the number of storks sighted and population of Oldenburg,
Germany, over a six-year period. It seems that Oldenburg has
attracted a large number of immigrants to study the works of the
great German philosopher Immanuel Kant. Needless to say, the
preferred diet there is wurst. A diet of wurst clogs up the arteries
and leads to slowness in mental acuity. But this decline leads to a
serious misinterpretation of Kant’s work, called
unkantverstehenlassenhummel. Written discourse about the
error leads to disorders of the eyes just from having to read such a
long word. The double vision that results creates spurious sightings
of storks with data reported at least double the actual numbers
involved.
To prevent double vision, we interviewed David
Fried, publisher, chief bottle-washer and cook at the Buyback Letter. Fried is
riding a wave right now. His newsletter has been ranked as tops at
picking stocks by Hulbert Financial Digest, the arbiter of such
matters. This is poetic justice since it was a Hulbert article based
on the Ikenberry work that inspired Fried to start his service in
the first place. The Buyback recommended portfolio is up some 8%
this year and some 86% since inception six years ago.
Fried
gets around the common problem of companies not actually following
through on announced buybacks by waiting until a quarterly report
confirms they have reduced shares outstanding. He filters those
observations with his studies, then pulls the trigger. In addition
to his letter, Fried says he manages some $20 million for clients.
The current recommendations of the letter are
SuperGen (SUPG,
news,
msgs)
and General Motors (GM,
news,
msgs).
They join 28 other standards purchased from as early as 1995 such as
Philip Morris (MO,
news,
msgs).
The average holding period of the 30 stocks in the portfolio is at
least three years. As to when to sell these, the decision seems in
the main to be based on waiting until the number of shares
increases.
Fried has an unusual background for a stock
market letter writer; two decades ago, he said, he founded a company
that makes schmattas, which is Yiddish slang for apparel, in case
you’ve never shopped on Orchard Street in New York. Despite his
success, we believe his work does not take into account the
possibility of regime shifts as described by Zajac and Westphal. Nor
are we thrilled with the paucity of his recommendations or the scant
methodology behind the sells.
It seemed to us that what the
doctor ordered was for the speculators to put on their bifocals and
take out the proverbial pencil and envelope to do some calculations
of their own. We compiled a list of every company in the S&P 500
($INX)
that has announced a buyback since the beginning of 2000. We tracked
the performance of these companies, including dividends, for the
year relative to the S&P 500. The buy date was the close the day
after the announcement. The sell date was one year later. We wanted
to include a full year’s performance so we cut off all announcements
after March 30, 2001 for this study; 224 companies
qualified.
Guess what? The results show that these companies
outperformed the S&P index by 30 percentage points a year.
Four-fifths of them went up more than the S&P 500 during the
comparable period. The average superior performance was more than
six normal deviations away from zero during this period, a result
that’s literally a 1-in-a-100 million shot by chance alone. More
important, there’s a 95% probability that during this period, the
average return for companies of this nature fell between 24% and
36%.
This is a truly striking result that shows that during
the current regime, S&P 500 companies that buy back shares are
signaling above-average prospects of return. We’re convinced and we
plan to buy all 13 stocks mentioned at the beginning of this
column.
A final note
We
have reported on many aspects of the hubris phenomenon in our
previous articles as well as the difficulties we had in garnering an
interview with General Electric (GE,
news,
msgs).
The two came together in a press release dated April 15, 2002
relating to concerns about the opacity of their financial statements
which read, in part: “We’ve addressed these issues calmly, with
explanations of our results, activities, culture and processes. We
understand that being the best makes one a lightning rod, and we
accept that level of scrutiny.”
Dare we speculate that our
inability to garner an interview from GE was in some way related to
the 25% decline in price this company has suffered since the
beginning of this year? Kindly give us your thoughts on hubris,
buybacks and how we can improve, by e-mailing us.
Information is so diffuse and so dynamic these days that the only
way two mere columnists can do a good job is to get guidance and
feedback from our readers. We’ll be happy to send you the complete
worksheet of our 220-plus S&P buybacks as a reward.
At
the time of publication, neither Victor Niederhoffer nor Laurel
Kenner owned or controlled shares in any of the equities mentioned
in this column.
|
