Share Buybacks

All investors have no doubt heard of corporations authorizing share buyback programs.  Trending123-ers currently have them in at least four portfolio stocks. If you don’t know what they are or how they work, at the very least you should understand that in most situations, they work in your favor.

Often, they will make your portfolio grow.

How?  Why?  Find out—commit the following 3 share buyback “truths” to memory a.s.a.p. :

Truth #1: Overall growth is not nearly as important as growth per share

• Too often, you’ll hear leading financial publications and broadcast talking about the overall growth rate of a company.  While this number is very important in the long run, it is not the all-important factor in deciding how fast your equity in the company will grow.
• What is most important? Growth per share

Truth #2: When a company reduces the amount of shares outstanding by declaring a stock buyback program, each of your shares becomes more valuable and represents a greater percentage of equity in the company.

• If the company employs shareholder-friendly management, it is a real possibility that someday there may be fewer shares of the company where each share is worth much more.
• When putting together your portfolio, make certain to seek out businesses that engage in these sorts of “pro-shareholder” practices—and hold on to them as long as the technicals stay intact!

Truth #3: Stock buyback programs are not good if the company pays too much for its own stock!

• Even though buybacks can be huge sources of long-term profit for investors, they are actually harmful if a company pays more for its stock than it is worth.  In an overpriced market, it would be foolish for management to purchase equity at all, even in itself.

TIMELY TIDBIT > Technology share buyback programs—especially in chips and software—have been popping up rapidly over the past month.  This points to profits to come!

On Friday, Texas Instruments Inc. (TXN) announced its foray into the share buyback program.  Next week I expect more of these types of share buybacks…(and especially over the next 2–3 months) to TRIPLE!

Technicals Meet Fundamentals

Technically speaking, company share buybacks are an element of fundamental analysis.  So if technical analysis generally ignores fundamentals, and Trending123 is all about technical analysis, why should we care about companies buying back their own shares?

Well, fundamental investors would note that a company buys back shares when it believes they are undervalued to increase the value of the remaining shareholders’ equity.  On the other hand, sometimes they just purchase shares to fulfill stock options awarded to employees.  Or they might even buy back shares just to say they did—that is, to make people think things are going well by putting out press releases touting their buybacks.

But regardless of the fundamental reason for a share buyback, the fact is that it often has a technical effect on the share price: The price goes up.  And the bigger the buybacks, the more likely that is to happen, because most companies don’t want to pay too much for their own stock—they only buy it when they expect it to go higher.

Trending123 is and always will be your source for technical analysis stock trading.  But that doesn’t mean we won’t take a cue from the fundamentals to make buckets of money.  How much money?  Click here to find out.