What the heck is going on with thismarket ? On two occasions
this week, the major indexes opened sharply lower and then clawed
back higher as the trading session wore on. From hour to hour, the
bears -- who fear a spreading European contagion, and the
market
bulls -- who've been digesting solid recent quarterly profits, are
wrestling for control of the market.
My take: the risks that could trigger a market pullback remain
formidable, and I don't want to touch stocks that don't have some
form of downside protection. This protection can come in many
forms, from a bulletproof
balance sheet
to a history of solid, recurring
cash flow
.
I also like companies that are prepared to defend their stock. The
companies I discuss below have recently announced major stock
buyback plans, and in a market slump, they'd be active buyers at a
time when few friends can be found. Just as important, any
market swoon
that does impact these stocks willmean more bang for the buyback
buck. In some instances, they may have a chance to sharply lower
the number of
shares outstanding
, which would set the stage for solidly higher
earnings per share (
EPS
)
in the future.
I've compiled a list of 19 companies that have made buyback
announcements since the second quarter began. And their reasons to
pursue a buyback now are numerous. Getting to the heart of why they
are buying backshares is the key behind seeing if they represent
real value.
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Not for me...
As a personal rule of thumb, I never like companies that look to
buy back
shares
unless the forward P/E (price-to-earnings) ratio is well below the
market average
. The only exception: if the near-term P/E ratios fail to represent
what kind of
earnings
power a company can eventually have.
Biotech firm
Biogen-Idec (Nasdaq:
BIIB
) and dental supplies distributor
Henry Schein (Nasdaq:
HSIC
)
aren't trying to bring attention to a lagging stock -- each trades
near its
52-week high
. Instead, they simply don't know what to do with their excess
cash. I think these companies would be far better off holding tight
-- let cash build higher and buy back shares some time down the
road when they've fallen sharply from their highs.
A previous favorite
Hecla Mining (NYSE:
HL
)
is a different story. I've recently written quite a bit about
this silver miner. As
I noted in this article
, if the company can keep its promise that a major shuttered mine
will come back online in about eight months, then 2013 results will
be far better. The company is using roughly one-third of its $280
million cash balance to buy back stock now, in anticipation of a
better outlook, and a higher stock price, in the
future.
The long slog back to relevance
In a similar vein, health care information provider
Allscripts (Nasdaq:
MDRX
)
is currently suffering from a botched
merger
, which I previously discussed in
this article
.
Allscripts' troubles means earnings per share (
EPS
) are constrained, likely staying below $1 this year and next. Yet
if management can make the right moves to fix the business and
return margins to historical levels, then
EPS
could move sharply higher. In the interim, the $200 million stock
buyback can be used to aggressively re-absorb shares while they
remain deeply out of favor. And this isn't a one-time move. In
fact, there is already another $200 million buyback plan in place
-- and even after that $400 million total is earmarked, Allscripts
still has $350 million available for future buybacks.
So why should investors expect profits to eventually move higher?
It's because the current numbers are being impacted by a series of
controllable factors that can be fixed. Allscripts' expenses have
spiraled too high as management never made a big cost-cutting push
after the company's mishandled merger with hospital information
systems provider Eclipsys.
Indeed, the recent moves to bring in fresh management and a new
chairman will likely lead to those cost-cutting measures investors
had already expected to see. As analysts at Auriga Securities note,
"the problems at Allscripts stem from the top, and we wouldn't be
surprised to see further leadership turnover." That creates
uncertainty right now, and shares may languish until the new team
is fully in place and investors hear more about their
turnaround
strategies.
Yet Auriga's analysts, even as they rate shares a "hold," have a
$14 target price, nearly 30% above current levels. And that target
is based on very low expectations: by their math, shares are worth
more than 15 times the downwardly-revised 2012 EPS of $0.90 (15 x
$0.90 = $13.50). That multiple currently stands at 12. To put that
in perspective, rival
Cerner (Nasdaq:
CERN
)
trades for around 35 times projected 2012 profits. Both of these
companies operate in the same high-growth industry. And Cerner
surely deserves a premium for better execution, but should Cerner's
P/E multiple be higher by a factor of three? If anything, Cerner is
operating at peak levels and has little fat to cut. Allscripts's
profit
potential is more robust, simply because it is currently too
bloated and also has room for improvement in terms of salesforce
execution.
This isn't an endorsement for Allscripts right now, though.
Instead, it's a chance for you to really come to understand this
business model
while it's deeply out of favor -- and then buy when you think the
time is right. Just a few months ago, investors were looking at
Allscripts as a decent company in a really attractive business.
After a deep fix, that will likely again be the investor sentiment
several quarters from now.
Risks to Consider:
Buybacks don't prevent stocks from falling -- they just cushion
the blow against even deeper falls.
Action to Take -->
Share count bloat is one of the key factors behind disappointing
EPS growth. Conversely, falling share counts can make a tepid
growth story look like much better. That's why these stocks are
often a fertile area for investment ideas. Aside from Allscripts,
any of the stocks in the list above should give you a good head
start on your research.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.