If every era of investing can be characterized by a few select
themes, then the current one can surely be noted by a stunning rise
in corporate cash balances. Many companies have spent the past few
years in cash-generating mode, yet they have seen few opportunities
to invest that cash into acquisitions or stepped-up capital
spending. As a result, with ever-rising cash balances, many of
these firms are looking to re-acquire their own company stock.
Earlier this month,
I profiled 10 mid-cap and large-cap companies
that had recently announced plans for major stock
buybacks.
Since then, asearnings season has progressed, a number of
smaller firms have followed suit. A few dozen companies have
announced new (or extended) buyback plans, and these 10 aim to
acquire more than 10% ofshares outstanding .
Not all buybacks make clear sense. In an ideal world, a company
should be buyingshares when the stock trades belowbook value ,
sports a very low forwardmultiple , or at least has come tumbling
down from its52-week high . So should you ignore stocks like
Calgon Carbon (NYSE:
CCC
)
, a provider of environmental remediation equipment, simply because
it trades for nearly two times book and more than 15 times
projected 2013 profits? Not necessarily.
I've written in the past
that this company is poised for rising demand as air and water
quality regulations tighten. Insiders, several of whom bought
shares late in the summer when they traded above current levels,
are surelybullish . But this isn't what I'dcall a "no-brainer
buyback stock."
The three "no-brainers" in this group:
Tellabs (Nasdaq:
TLAB
), CYSInvestments (NYSE:
CYS
)
and
Nacco Industries (NYSE:
NC
)
, simply because they trade below book value. Any shares bought
back at such discounted levels means they can create an even lower
price/book ratio.
Let me explain. Let's say a company has $250 million in
cash, book value of $1 billion and amarket value of $900 million
(or a 0.90 price/book value). Now, let's say the company
spends $200 million on a buyback. Well, the book value falls to
$800 million (as cash is reduced) and the market value falls to
$700 million (as the share count falls and the share price stays
constant). This stock would now trade for about 0.88 times book
value (700/800).
The fact that Tellabs and Nacco are buying back shares after
they have fallen more than 35% from the 52-week high is another
plus. If you see a company buying back stock while it's right near
its 52-week high, then it is tacitly admitting that "we have too
much cash right now and lack creative ways of deploying it
elsewhere."
I'd make an exception to this "below book" rule for
Acacia Research (Nasdaq:
ACTG
)
, which has anasset base that is likely understated on thebalance
sheet . Acacia acquires -- and then exploits -- a range of
technologypatents , securing multi-year licensing agreements in
areas such as wireless communications.
Acacia's growingpatent portfolio has fueled at least 30%
top-line growth in 2009, 2010 and 2011. Thanks to a steady jump in
patentacquisition activity during the past 18 months, coupled with
an ongoing stream of new licensees, sales should rise more than 50%
this year, to around $275 million. The high-margin nature of
licensing revenue meansearnings should more than double this year
to above $1 a share, and above $1.25 a share in 2013.
Still, those growth forecasts are a bit lower than where they
stood six months ago, as management concedes that some large
licensing agreements are taking longer to negotiate. Even if some
of those talks slip into 2013, and even if some talks end without
bearing fruit, this is still shaping up to be a solid growth story.
Consider that in the first nine months of 2012, Acacia has acquired
45 new patent portfolios for $214 million -- and still has more
than $400 million in net cash in the bank. If shares remain
depressed after the current buyback is completed, you can look for
a possible additional buyback program to take place.
Risks to Consider:
Buybacks done atmarket highs can be a waste of shareholder's
money, so if the market tumbles a lot lower from here, then these
current buyback programs will have proved to be poorly-timed.
Action to Take -->
The silver lining of a falling market is that buyback plans can
defend shares with buying (when sellers are otherwise dominating
the trading tape) and can also sop up even more shares if the stock
price falls. Each of these companies stands to cut the share count
(and boost earnings per share) by at least 10%, and a falling stock
price would just magnify thatleverage . Use this list as a starting
point to find a good buying opportunity. But don't be simply
looking at buyback announcements in a vacuum. Take note of
the relative valuations of the company in question -- especially to
see how close to book value it trades -- and assess the financial
strength of the company in question. If the buyback will be
done out ofcash flow and not from cash balances, then the company's
financial strength could come into question in an economic
downturn.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CCC in one or more of its "real money" portfolios.