buybacks - What We're Reading - StockBuz2024-03-28T13:42:09Zhttp://stockbuz.ning.com/articles/feed/tag/buybacksTactically Cautious On Global Equitieshttp://stockbuz.ning.com/articles/tactically-cautious-on-global-equities2016-10-14T16:55:27.000Z2016-10-14T16:55:27.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities. <em>Comments in italics are mine.</em></p>
<p><a href="http://blog.bcaresearch.com/wp-content/uploads/2016/10/DIN-20161011-091957.png"><img src="http://blog.bcaresearch.com/wp-content/uploads/2016/10/DIN-20161011-091957.png" alt="DIN-20161011-091957" class="alignnone size-full wp-image-13419" width="547" height="601"></a></p>
<p>The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.</p>
<p>Lackluster earnings growth remains another concern. S&P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a firm U.S. dollar will limit any recovery in margins. A Trump victory could also trigger a trade war, while a Clinton triumph could mean higher taxes and increased regulatory burdens. <em>Let's not forget further spotlight on biotech and drug prices.</em> Both will be headwinds for the corporate sector. <em>Let us also not ignore the "hard Brexit" tensions and $DB worries across the pond as well as China slowdown in exports. When will they ever hit bottom? It all makes you want to be long USD and short the Euro, GBP and CNY. Oh btw, if the USD continues to benefit, what will that do to the energy sector which has been so hot in 2016? Can OPEC's talk of holding production hold true when so many producing countries are not OPEC members? What weight will that place on SPX?</em></p>
<p><em><a href="http://storage.ning.com/topology/rest/1.0/file/get/1291316?profile=original" target="_self"><img src="http://storage.ning.com/topology/rest/1.0/file/get/1291316?profile=RESIZE_480x480" class="align-full" width="400" height="366"></a></em></p>
<p>Bottom Line: Our <em>Global Investment Strategy</em> service believes global equities are vulnerable to a near-term correction.</p>
<p><em>This does not mean we can't see individual stocks climb higher on news or their potential implied price targets however "bears" tend to choose their entry levels as I have. Last Summers "breakout' in SPX did not exceed 4% of the prior level and is therefore suspect in my book. I am short in certain names (LULU, BIDU, TSLA to name a few) and will establish more as needed. I am still long some equity names at the same time; mostly anticipating higher rates.</em></p>
<p>Courtesy of <a href="http://blog.bcaresearch.com/tactically-cautious-on-global-equities" target="_blank">BCA Research</a></p></div>Buyback Boost To US Stocks To Dwindle As Cash Flow Shrinkshttp://stockbuz.ning.com/articles/buyback-boost-to-us-stocks-to-dwindle-as-cash-flow-shrinks2016-04-16T21:49:35.000Z2016-04-16T21:49:35.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291314?profile=original"><img class="align-left" style="padding: 10px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1291314?profile=RESIZE_480x480" height="218" width="350"></a></p>
<p><span style="color: #ccffcc;"><em>Another one that says what could cause a collapse; of course they never say "when" it will happen. Another reason to remain cautious and take winners where you can.</em></span></p>
<p>According to <a href="http://www.cnbc.com/2016/04/15/reuters-america-buyback-boost-to-us-stocks-to-dwindle-as-cash-flow-shrinks.html" target="_blank">CNBC</a>, the S&P 500 is close to its record high as earnings season heats up, but one of the major drivers of the market's advance - stock buybacks - looks to be sagging.</p>
<p>U.S. companies announced about $182 billion in buybacks in the first quarter, according to Birinyi Associates research, putting buybacks on pace for their weakest year since 2012. Strategists link this, in part, to falling cash flow, a trend that is expected to worsen in coming quarters.</p>
<p>First-quarter earnings per share are expected to fall 7.8 percent, but more importantly for the outlook for buybacks, revenues are set for a fifth consecutive quarter of decline. Thomson Reuters data forecasts a 1.1 percent revenue drop.</p>
<p>Cash flow is a better indicator of buybacks prospects than earnings, as per-share earnings can be managed through cost-cutting such as asset sales and cutbacks. Weak free cash flow, on the other hand, cannot be papered over. The expectation is that buybacks, which have become part of the corporate finance routine in recent years, could slip in coming quarters as a result.</p>
<p>"More companies are decreasing their cash flow from operations, which does not really lend itself to repurchases," said Abhra Banerji, director of quantitative research at Evercore ISI. "They may honor existing commitments that they have made - but it is unlikely they will issue new ones."</p>
<p>Banerji notes that the share of S&P 500 companies increasing cash flow has slipped from about 55 percent in mid-2014 to about 49 percent now.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291348?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1291348?profile=RESIZE_480x480" width="444"></a>Aggregate cash flow for S&P 500 companies is estimated to have increased by almost 16 percent in the first quarter compared to a year earlier, but is seen flat in the second quarter and falling markedly in the second half of the year according to a data analysis by David Aurelio, research analyst for Thomson Reuters I/B/E/S. (Graphic to the right)</p>
<p>Even with the increase in the first quarter, the number of buyback announcements fell to 58, compared with an average of 76 in the first quarter of the past three years, according to Evercore.</p>
<p>For example, ExxonMobil Corp, which has spent more than $200 billion in buybacks in the last decade, more than any other company, chose to refrain from buybacks altogether in the first quarter. The largest U.S. energy company said then that it would "evaluate" the buyback program each quarter. It reports results on April 29.</p>
<p>LOOMING SQUEEZE</p>
<p>Industries expected to feel the biggest free cash flow squeeze in the second quarter include energy, consumer services companies, such as McDonald's ; the capital goods sector with big share repurchasers like Caterpillar and Boeing , and diversified financial companies such as Goldman Sachs, according to Thomson Reuters data.</p>
<p>Those companies rank in the top 20 percent of share repurchasers in the last decade. In the last two years, spending on buybacks and dividends surpassed overall companies' net income for the first time outside of a recession, according to a Thomson Reuters analysis.</p>
<p>Now, companies mostly associated with buybacks, particularly those with high ratios of buybacks to their market value, could struggle as they see cash flow sink.</p>
<p>Four of the top 10 members of the S&P Buyback Index - Michael Kors, Emerson Electric, Parker-Hannifin and Scripps Networks are expected to report falling per-share cash flow in the first quarter of 2016, according to Thomson Reuters I/B/E/S data.</p>
<p>This buyback index, long an outperformer against the S&P, has lagged the broader average since early last year. The index is down 4.7 percent from the beginning of 2015 until April 14 of this year while the S&P is up 1.4 percent in that time.</p>
<p>Michael Kors, an apparel company, is among the worst performers, down 30 percent in that time.</p>
<p>Buybacks also help company earnings look better than the weakened revenue figures suggest, as the lowered share count boosts earnings per share. If repurchases fail to keep up with the recent pace, the effect of declining earnings on valuations could be magnified.</p>
<p>"It makes a declining fundamentals picture perhaps a little bit worse that it would be," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.</p>
<p>Cash has, however, not been the only fuel for the buyback frenzy over the past six years. Many companies have taken advantage of historic low interest rates to borrow and use the proceeds to purchase their own stock. There has been nearly $7 billion in U.S. corporate bond issuance in the last five years, according to Securities Industry and Financial Markets Association (SIFMA) data.</p>
<p>"The pace of net buybacks accelerated in the last two quarters of last year even as earnings declined," said Brian Reynolds, chief market strategist at New Albion Partners in New York. He added that the ongoing boom in bond sales means more companies will "start leveraging their balance sheets for more buybacks," that is, selling more debt to pay for their shares.</p>
<p>What might affect this calculus is an upward drift in interest rates. If the Federal Reserve continues to raise interest rates in response to jobs growth and a perceived stronger economy, long-dated bond yields will also rise, increasing the cost for companies who want to buy back shares. That, in addition to weak cash flow figures, could prove a double-whammy for the stock market.</p></div>Buybacks As Spreads Narrow. The Greatest Fools Of Allhttp://stockbuz.ning.com/articles/buybacks-as-spreads-narrow-the-greatest-fools-of-all2016-04-16T20:10:58.000Z2016-04-16T20:10:58.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="https://i1.wp.com/www.thefelderreport.com/wp-content/uploads/2015/06/Stock-Market-Bubble.jpg?zoom=1.5&fit=800%2C540&ssl=1"><img class="align-full" src="https://i1.wp.com/www.thefelderreport.com/wp-content/uploads/2015/06/Stock-Market-Bubble.jpg?zoom=1.5&fit=800%2C540&ssl=1&width=600" width="600"></a></p>
<p><span style="color: #ccffff;"><em>Of course, no where does it say how long this can continue but it's important to be aware. No, it can't go on forever.</em></span></p>
<p>We are now entering earnings season once again. Pre-announcements have been the second-worst seen over the past decade.<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291333?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291333?profile=RESIZE_1024x1024" width="641"></a></p>
<p>This has analysts lowering estimates. In fact, they’ve been lowered so far quarterly earnings now look to fall all the way back to 2009 levels.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291379?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291379?profile=RESIZE_1024x1024" width="643"></a></p>
<p>For the trailing twelve months earnings are now back to 2011 levels…</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291409?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291409?profile=original" width="647"></a></p>
<p>…even while stocks remain 75% above their own levels from back then. Taken together you get a price-to-earnings ratio of 24, higher than any other time over the past several years.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291487?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291487?profile=RESIZE_1024x1024" width="648"></a></p>
<p>It should go without saying that extreme valuations and falling earnings are not a bullish recipe for stocks.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291568?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291568?profile=RESIZE_1024x1024" width="647"></a></p>
<p>So the fundamentals are not supportive of higher prices. What then has been driving them higher in recent weeks?</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291578?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291578?profile=original" width="644"></a></p>
<p>And the greater fools are none other than the companies themselves…</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291590?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291590?profile=original" width="646"></a></p>
<p>…for now. If earnings don’t turn around soon (and corporate spreads narrow), it’s going to be hard to maintain the current pace of buyback activity.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291602?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291602?profile=original" width="647"></a></p>
<p>Just by glancing at the chart above it’s easy to see that companies have been the greatest fools of recent market cycles, expanding their buyback activity at the highest valuations and reducing them during the most attractive ones, hardly a <a href="https://www.thefelderreport.com/2014/08/07/how-to-time-the-market-like-warren-buffett/" target="_blank">legitimate theory</a> of investment value. This cycle appears to be no different.</p>
<p>Courtesy of <a href="https://www.thefelderreport.com/2016/04/05/dont-buy-the-greatest-fools-theory-of-investment-value/" target="_blank">Felder</a></p></div>Stock Buybacks; Sustainable Smoke And Mirrorshttp://stockbuz.ning.com/articles/stock-buybacks-sustainable-smoke-and-mirrors2014-07-14T17:42:29.000Z2014-07-14T17:42:29.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290774?profile=RESIZE_480x480" height="412" width="320"></a>My simplistic view of the stock market, the one my muddled brain is able to wrap around, is to imagine that of the waterfalls at the Continental Divide at Glacier National Park in Montana. Numerous rivers, all converging into to one. Hedge funds, pension funds, investment firms, your own 401k, option flows, you name it.........and share buybacks.</p>
<p>Throughout the recovery, the amount of cash being held on corporate balance sheets was in some instances, astounding, leaving many investors wondering if/when the cash would be deployed. </p>
<p>Well if you haven't noticed, they have been deploying more and more. Just imagine the many <em>streams</em> you see in this image to the right. One is M&A which can be the acquisition of a company to compliment ones existing structure OR a direct competitor which is a plus for a stock by making your space that much smaller. Another stream, a small one, is (hopefully) R&D, another stream represents cash being returned to shareholders via higher dividends and lastly we're seeing a <span style="text-decoration: underline;">great deal</span> (large, wide stream) in the way of share repurchase programs.</p>
<p>You may ask "why repurchase shares when the markets at an all time high?"</p>
<p>Smoke and mirrors my friend. Smoke and mirrors - especially when they're uncertain about near term sales and EPS growth. Allow me to explain:</p>
<blockquote>
<p>If a company has 10 million shares outstanding and earns $10 million per year, its earnings per share (EPS) is $1 ($10M/10M shares). If the stock has a price-to-earnings ratio (P/E) of 15, the stock will trade at $15 ($1 in EPS x 15 P/E).</p>
<p>When the company buys back 1 million of its shares, it still earns $10 million per year in profit, but now that $10 million is divided by 9 million shares instead of 10 million.</p>
<p>So although the company didn't earn any more money, earnings <em>per share</em> rises to $1.11 ($10M/9M shares). If the stock continues to trade at a P/E of 15, the stock climbs to $16.65.</p>
<p>Look at what just occurred. There was no change in the company's business, but through a reduced share count, earnings per share and the stock price jumped 11%.</p>
</blockquote>
<p>Now this gives companies the ability to beat EPS because of the smaller float. Nice trick, aye?</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290809?profile=RESIZE_320x320" width="300"></a>Now one alarm goes off in my head as I ponder this. <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290828?profile=RESIZE_320x320" width="307"></a></p>
<p>Namely <em>how long can buybacks be sustained?</em> What happens when the river begins to dry up? </p>
<p>Well the hope would be that the economy, and overall demand, has recovered sufficiently to take over but what if it doesn't? </p>
<p>What if global economies continue to be slow to heal. Certainly rates are low, allowing companies to borrow on the cheap however is this trend sustainable?</p>
<p>Just food for thought my friends.......</p>
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<p>(Click image to enlarge)</p></div>