Market Edge Report empowers the
. Each report investigates a single market metric in depth. We
don't just give you numbers, we show you where to find them
yourself, suggest what you might want to watch for, and offer
some perspective as to what it all means.
Part Two: Using stock buyback data to make better
of the report I focused on why and how stock buybacks increase
share price. If you aren't familiar with that why and how, that's
the place to start. Now we are getting into market strategy.
First, understand that a stock buyback plan is a forecast on the
part of a company's management that the company cannot safely
expand as fully as its profits would allow it to if the world
were of infinite size. For mature companies, this is a reasonable
assessment - it makes no sense for growth companies unless some
unusual force (an investigation by the Justice Department, for
example) is preventing growth.
That isn't rocket science, but you will note that even if that
is all you know, you know enough to make some judgement calls.
Sometimes a company gives the Street aggressive growth targets in
its quarterly guidance but chooses to spend most of its cash on
stock, rather than expansion. That means the company isn't
putting its money where its mouth is, and every shrewd investor
knows to follow the money, not the mouth.
Of course, few cases are so clear cut, and while stock buyback
information won't normally tell you which individual companies to
buy, it is very useful if you wish to take the temperature of an
entire industry - or the entire market. Consider the chart below,
In Q4 2013, companies spent $126 billion on share buybacks.
(For comparison, companies spent $80.6 billion on dividends
during the same quarter.) This amount was a 25% increase over the
year-ago quarter, but essentially unchanged from the previous
two. Looking back, we can seen that the dollar amount being spent
on share buybacks more than doubled in the three years leading up
to the financial crash, confirming the logical supposition that
spending a lot of money on share repurchasing is a company's way
of telling the market that it sees trouble brewing.
Now, consider the chart of Q1 2014, also from
It turns out that there was a very steep increase in spending
on share repurchases during the quarter. Companies spent $154.5
billion on their own shares - a 50% increase from the year ago
quarter and a substantial increase from the previous quarter.
(For comparison, companies spent $90.5 billion on dividend
payments during the same quarter.) Though I remain a perma-bull
at heart, this large increase gives me pause. The rise in Q1 2014
actually bears more than a passing resemblance to the rise in Q1
But you didn't read this far just to hear general market
doom-saying. Let's have a look at which industries have been
doing the most stock-stroking. Consider the chart below from the
report, which compares the spending in the most recent quarter to
the historical average for the sector.
It turns out that the biggest culprit by far is the
Information/Technology sector, which spent a huge $47.4 billion
on its own shares in Q1 2014 - almost twice what it usually
spends. Look a bit closer and you'll also note that the financial
industry was relatively sparing in its use of stock buybacks.
That company's the work with money can find better uses for their
money in encouraging, and suggests that there must still be some
good investments out there somewhere. For now, however, it might
be prudent to tread lightly in Information and Technology.
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