Stocks are Cheap and the Biggest Buyers are Jumping Back In
$DIA, $SPY, $QQQ, $RUTX, $VXX
Companies are the biggest purchasers of their own shares, and they were absent from the market for the last several weeks, just as stock prices were tumbling on worries about global trade and rising interest rates.
Businesses were holding back on repurchases because they were in a “blackout”frame for buybacks, a regular occurrence leading up to the release of their Quarterly results.
Now that most companies in the benchmark S&P 500 Index (SPY) have given their Q-3 reports, blackouts are lifting, and analysts across Wall Street say the return of those buyers should help support the market.
The S&P 500 climbed over 3.0% to Friday, after losing nearly 10% in the 4 weeks prior.
The USD amounts are huge, a result of the record profits that companies have been producing thanks in part to lower tax bills.
Corporations in the S&P 500 index may buy back up to $1-T of their own stock this year, some analysts estimate. That’s enough to give every American $3,000. Last year, S&P 500 companies repurchased $519.4-B of their stock, according to S&P Dow Jones Indices.
The recent pull back in stock prices leaves those shares more attractively valued, which gives even more incentive for companies looking to repurchase their own stock.
We xpect Bank of America, Citigroup and Wells Fargo to be among the most aggressive big banks in repurchasing their shares, for example. Bank of America’s stock trades at 9.7X its expected earnings per share over the coming year, cheaper than the price-earnings ratio of 11.1X that it had late last month.
Stock repurchases help investors and companies in a 2 ways:
- They provide support for stock prices by adding more buyers to the market
- They also drive 1 of the most important profit measures that shareholders judge CEOs by: the company’s earnings per share.
When a company makes $100 in profit, each investor checks how much of that their shares can lay claim to. If there are 100 shares, the company earned $1 for each. But if the company takes 50 shares off the market by buying them back, suddenly $100 in profit becomes $2 for each share.
Buybacks are particularly important when companies are issuing many new shares of stock to pay their employees or to raise cash, which can dilute the ownership stakes of longtime investors. By repurchasing their shares, companies can mitigate or completely offset the effect.
So far this earnings season, nearly 20% of reporting S&P 500 companies have said that reduced share counts gave them a boost of at least 4% in earnings per share, according to S&P Dow Jones Indices. If the pace continues, it would be an acceleration from last year’s 14$ of companies.
It pays to keep track of such numbers because the stock market’s big winners tend to be the companies that most reduce the number of shares they have trading in the market.
Among big companies, it can mean triple the performance.
Since Y 2000, companies that trimmed the number of their shares outstanding by the widest margins returned an annualized 12.4%, according to strategists at Jefferies. Their counterparts on the opposite end of the spectrum, which increased their share count by the largest amount, returned just over 4%.
And big companies tend to be more likely to reduce the number of shares they have outstanding than small companies, which tend to issue new stock to help them grow.
Shayne and I believe that buy backs will pick up thanks to huge piles of cash on balance sheets and now stock prices are down. In the large caps, we do see buy backs stabilizing the overall market.
Friday, the major US stock market indexes finished at: DJIA -109.91 at 25270.83, NAS Comp -77.06 at 7357.19, S&P 500 -17.31 at 2723.20
Volume: Trade on the NYSE came in at 989-M/shares exchanged
- NAS Comp +6.6% YTD
- DJIA +2.2% YTD
- S&P 500 +1.9% YTD
- Russell 2000 +0.8% YTD
Heffx-LTN’s US Major Stock Market Indexes Technical Analysis for the Week ended 2 November 2018
Have a terrific weekend