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Monday, May 30, 2005
Market Recap
The market traded like it was in a trance on Friday. Not much excitement with one of the weakest volume days of the year so far. Light volume was to be expected the day before the Memorial Day long weekend. The DOW was up 4 points, the NASDAQ also gained 4 points, and the S&P gained 1 point. The good news is, the market is not giving back any of the gains made in this run-up. I would have expected at least a small pullback already but so far that has not happened. The market seems steadfast on making upside progress and the technology heavy NASDAQ has been the leader in this advance. INTC, although a slow mover, is leading the NASDAQ higher and has had one of its best runs in a few years. We continue to see the rotation into sectors like technology and biotech. Recall a couple weeks ago, I said that these two sectors would be the leaders in the next market move and so far, we are seeing a rotation into these groups and they are looking very strong.
Although I think the market is due for a pullback, I have removed all of the remaining shorts from our watch list with the exception of one stock. This is because at this time, I feel it is best to concentrate on the strong stocks in the market, the leaders.
The Truth About Stock Buyback's
A stock buyback is a company's plan to buy back its own shares. Buybacks are carried out in one of two ways:
1) Shareholders are presented a tender offer with which they have the option to submit (or tender) a portion or all of their shares within a certain time frame. This is usually at a price higher than the current market level.
2) Companies can buy shares on the open market, over a long-term period. This buyback reduces the number of shares available on the open market. For the most part, an announcement for a share buyback is considered good news for shareholders. Keep in mind that there are many different reasons a company might want to repurchase shares and do not assume that all buybacks are positive.
When the market is bad, stock prices are depressed and earnings multiples tend to be lower. If a stock has been hit hard and falls below what it should be worth, an investment in the stock could give a better return than any other opportunity facing the company. This is especially true if a company has a ton of cash on hand because cash typically earns less than 2-3% interest. Another good reason to buy back shares is to defend against takeover bids or use them to buy other companies.
Another reason a company might do a buyback is to prop up its share price and other financials. This approach is more questionable if the reasoning is just for making financial ratios look better. Plowing extra cash back into stocks reduces outstanding shares and also reduces the assets on the balance sheet, because cash is an asset. Thus, the return on assets (ROA) will increase because the assets are reduced, and return on equity (ROE) increases because there is less outstanding equity. Another example would be, suppose a company's earnings are identical before and after a share repurchase. The earnings per share (P/E) would look better, even though the earnings did not improve. The same income with fewer shares outstanding equals a lower P/E.
An additional reason for a buyback is to reduce dilution caused by employee stock option plans. Companies that handed out stock options to employees like water during the big bull market of the late 90s took it on the chin back then, when those options were exercised. Every option that is exercised increases outstanding shares and reduces EPS.
Buyback programs are sometimes nothing but a marketing ploy. The average investor hears that a company has announced a buyback program and they immediately get excited. They buy the stock trying to get in and get a better price than the company will get. The truth is, just because they announce a buyback, does not mean that they are obligated to buy back shares. Announcements are often worded like “A buyback of up to X million shares, over the next X number of years". The company has no legal obligation to carry out that pledge.
If a stock is undervalued, the buyback positive, however, be cautious if a company is merely using buybacks to prop up its ratios or get out from under excessive stock option grants. The next time you hear news of a buyback and a stock jumps on the news, do not be in a rush to jump on board. The professionals will short the reaction high because they know the buyback could be months, or even years away if carried out at all.
STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts that we have annotated for each stock listed in the past.
For New Members
For all of the new members with us, please make sure to read the link “How to use Bulletin” at the bottom of the Bulletin page on the website. It is critical that you know how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings, you can either use the link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
Stockcharts Listing
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http://stockcharts.com/def/servlet/Favorites.CServ...
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