I think we NEED some GREAT PR to 'jump-start' ODP...this UNDERVALUED company is the ideal equity in this present environment, IMO...
Interesting article on stock buybacks:
stockselector.com
January 7, 2000
Follow the Leader
<<<By Ian Mount
BUYBACK ATTACKWHOM DO YOU TRUST more? Wall Street analysts or company management? If you chose the latter, then you should be interested in tracking share buybacks. These occur when a company's management thinks its stock is cheap and decides to repurchase its own shares. Often these announcements signal that a stock is about to surge ahead.
According to a study from Prudential Securities, stocks that were performing buybacks of at least 1% of their shares outpaced their nonbuyback peers on average by between 3.7% and 5.0% annually. Mid-cap stocks had the biggest margin of outperformance, though small and large caps also outperformed.
Of course, not every buyback results in a stunning price increase. A cynical investor might point out that companies often don't complete the buybacks they announce or argue that they turn around and reissue the shares as management stock options or suggest that they make these announcements to distract investors from bad news.
Sure those things happen. The trick is to sort out the well-intentioned buybacks from those that may just be hot air. And so, for today's screen we started with the 257 companies that announced buybacks in November and December, according to Thomson Financial Securities Data. Then, using our recipe, we cut this list down to 22 companies with high anticipated-earnings growth, low debt and P/E ratios below the S&P 500's, which is about 30 on trailing 12-month earnings.
It should come as no surprise that technology stocks are woefully underrepresented on this list. In fact, the vogue in the technology world today is to offer more shares for sale. Beware. That could be a negative indicator. According to a study of the market from 1970 to 1990 performed by University of Illinois professors Tim Loughran and Jay Ritter, the average annual return of companies offering more shares was 7%, compared to 15.3% for nonoffering companies. As Kenneth Froewiss, a professor at New York University's Stern School of Business, says, "[A follow-up offering] means that somebody who knows the company's prospects thinks it's a good time to sell."
The argument for looking benevolently on a share buyback is simple and runs as follows: A share buyback lowers the number of shares outstanding, which in turn raises earnings per share. This often raises the stock price. The buyback also means that there's one more big buyer in the market creating demand for the stock. Most importantly, to paraphrase Froewiss, it means that somebody who knows the company's prospects thinks it's a good time to buy.
But how do you tell which buybacks are meaningful? We'll follow the advice of David Fried, editor and president of the Buyback Letter, who says, "The mid and large caps are more dependable. Their earnings are more predictable, and they're just bigger and better run." And remember, according to the Prudential study, the margin of outperformance was best for mid caps.
Removing the small-caps from our list of 22 finalists got us down to nine companies, the largest of which is medical-instrument supplier Baxter International (BAX), with an $18.2 billion market cap, and the smallest is dental-instrument supplier Dentsply International (XRAY), with a market cap of $1.2 billion.
This leads us directly into another important criteria, which is the buyback size. The higher the number as a percentage of the company size, the bigger the possible bonus. Using this measurement, Dentsply is one of the more frugal on our screen, with its announced buyback of up to one million shares amounting to only 1.9% of those outstanding. Financial services company State Street (STT) is taking even less, with its two-million-share buyback increase amounting to just 1.3% of its shares (with another 1.2 million shares left over from a previous buyback announcement, that number goes up to 2%).
According to the Buyback Letter's Fried, the cutoff for a truly meaningful buyback is one that leads to a 3% year-over-year decrease. Baxter almost makes the cut with an announced buyback of $500 million amounting to about 2.8%. Barnes & Noble (BKS) looks attractive with a planned $250 million buyback amounting to 18.4% of its market cap. Direct marketer Harte-Hanks's (HHS) announced buyback of four million shares is also interesting, as it amounts to about 5.8% of its outstanding shares.
Of course, it's also very important to consider a company's history of follow-through on its buyback announcements. Though State Street's buyback is small, it's likely to happen. Since 1995, the company has bought back 12.8 million shares. And Hart-Hanks has bought 9.6 million shares since January 1997. On the other end of the spectrum, investment advisor T. Rowe Price (TROW), which just announced a four-million-share (or 3.3%) buyback, took almost four years to repurchasse 5.2 million of the 6.7 million shares up for repurchase at the end of 1995. At that rate, it will be the winter of 2002 before its recent buyback is completed, far short of a 3% year-over-year decrease.
Investors looking at buyback companies should also make sure insiders aren't doing heavy selling after a buyback is announced, Fried says. It shows a lack of confidence in the success of the buyback. "If I see insider selling at the same time, I stay away," Fried says. Of our nine, several, like Baxter and State Street, have experienced recent insider sales. But others, like Family Dollar Stores (FDO), have had insider purchases.
Finally, remember that buyback shares are often cheap because investors have legitimate fears about a company's prospects. The biggest buyback contender on our list is the health-maintenance organization (HMO) PacifiCare Health Systems (PHSY), which announced a 12-million-share buyback representing 27.5% of its 43.6 million shares outstanding. The stock is off 50% from its 52-week high and trades at a discount to its industry. But there's a good reason for the plunge. The company has a large percentage of Medicare patients, who are becoming less and less profitable as the government reins in its spending on the program. (See our story).
Of course, management may know something Wall Street doesn't. Which gets us back to the question: Whom do you trust more? >>> |
