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dwotBuyback (< 20)

PKW - Under Performance Thesis

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January 27, 2008 – Comments (15) | RELATED TICKERS: PKW

Hodarius found this beauty ETF that only holds companies that have bought back 5% of their shares or more in a year, and gives reasons for why it should be an easy underperform. 

There is simply no question that extra buying pressure has to push the price up more so than it would without the buyback. 

I have not looked at or evaluated the companies here, I've simply underperformed the top 200 holdings in PKW.  I believe there are 228 holding.  I also haven't looked that closely at when they are making their buys relative to the 5% buyback.  I am assuming the companies have already made the 5% buyback.

Other reasons that I believe these buyback companies will underperform, and I haven't checked out these companies, is that many of the companies that I have looked at have actually borrowed to do some of the buying back.  This is a double whammy to investors.  The share price is being pushed up by the buy back, and by borrowing they company is ensuring earnings decline because of the interest expense that has been added to the balance sheet.

The other huge problem is that the buybacks tend to not result in much of a reduction of  shares because of the enormous options given to executives.  I forget which company I was looking at, but it was an extreme and for every 5 shares bought back, exectives cashed 4 options so total decline in shares was only about 1%.

But bottom line, these buybacks are line the executive's pockets and pay the investor selling out at the gross expense of new  investors.  Long term investors are not likely to keep the gains that are currently making them happy with their investment.

It looks to me that the last day on the market 128 of these picks outperformed the S&P on Friday in that they gained or lost less than the 1.59% decline of the S&P.

I don't intend to change the picks in this profile even though PKW will likely change its holdings over time.

15 Comments – Post Your Own

#1) On January 27, 2008 at 9:41 AM, Hudarios (< 20) wrote:

Great idea, dwot!  Ride these stinkers down!

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#2) On January 27, 2008 at 10:22 AM, dwotBuyback (< 20) wrote:

Can we misrepresent the facts or what.  I am looking closer at this thing and this chart.  They have the chart going back to 1996 on the shares yet the fund only started in 2006.  So, they have a disclosure:

"The Share BuyBack Achievers™ Index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the hypothetical performance shown. The Index does not lend securities, and no revenues from securities lending were added to the performance shown. You cannot invest directly in the Index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in the Fund."

By the chart over the 11 years these picks have far out performed the market, but I strongly believe that the demand has been inflated by the buybacks and they have the furthest to fall once the buybacks stop.  It certainly is the picture of a graph that I run from with investing...

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#3) On January 27, 2008 at 11:52 AM, misterpickles (< 20) wrote:

Here are the top holdings according to MSN money..

http://moneycentral.msn.com/investor/partsub/funds/holdings.asp?ETF=true&Symbol=PKW

Not exactly stinker companies IMHO.

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#4) On January 28, 2008 at 9:58 AM, dwot (99.88) wrote:

Hmmm, I don't like this.  I had 200 picks and only 92 are showing up right now...

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#5) On January 28, 2008 at 11:42 PM, Hibachi0 (91.81) wrote:

I cannot believe that you are top 20 with your insane investment ideas.  You have just shorted everything of questionable merit, and have been rewarded stupendously.  This is why I refuse to short stocks on caps, it takes zero skill and it just too easy.

It is interesting that you say they are financing them with debt, but otherwise buybacks are a good thing for companies when they are underpriced.  The faith has to be in management. Share dilution would happen anyway, and it is clear by your own research that buyback stocks outperform the market by nearly 9% a year.  I dont see how you can argue with that.  Buybacks are encouraged by many investment guru's, especially Buffet, who despises dividends.

Instead of listening to Buffet, you have decided to listen to Hodarius, who has the most points in all of Caps (scoring error), and yet isnt even an allstar because he can barely pick 4 out of 10 stocks correctly.  Give me a break.  A Monkey on a dartboard can do better.  Dont short a single stock from this group in your good account and you will stay a top 20 fool.

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#6) On January 29, 2008 at 7:03 PM, dwot (99.88) wrote:

Hibachi0,

I hardly think applying supply and demand theory to investments is insane, indeed, I so believe in supply and demand theory.  If they are buying back their stock they are artificially increasing demand.

I would not say that Hodarius influenced me in this perspective.  When I looked deeper into a stock and the buyback I have been horrified by the numbers.  I have previous done posts about buybacks.  Hodarius simply pointed to a ETF that specializes in these buyback companies. 

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#7) On January 29, 2008 at 7:13 PM, dwot (99.88) wrote:

One thing I didn't think about was CAPS does give increased leverage in the score for dividend stocks the way it takes off the start price any dividend paid.

Say a stock paid 10% dividend and it went up by 10%.  That is effectively a 20% gain, but caps would give a .2(1-.1) % = 22.2% and the leverage of what caps gives increases.  Say in two years you got 20% dividends and the stock went up 20%, or 40% over two years.  Caps would give .4/(1-.2) = 50%.

I will gradually look closer at the various companies. 

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#8) On January 29, 2008 at 7:20 PM, dwot (99.88) wrote:

I hate when people come out and say try to project power and wisdom by name throwing of other people yet the "facts" being spit around can be thrown in the garbage with a single search.

http://capital-flow-analysis.com/capital-flow-watch/warren-buffett-attacks-buyback-option-schemes.html

The very first nano-second of a search to substantiate your position blows it out of the water.  Go away, you aren't informed and you are nasty in how you state your position.

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#9) On January 30, 2008 at 4:02 PM, Hibachi0 (91.81) wrote:

1) if a company earnings is to be valued the same p/e regardless of earnings, buybacks are good.  same earnings/less shares equals greater earnings per share.  even if they are "artificially" increasing the price of the stock as you claim, they are increasing it. This way, you essentially have your dividends reinvested for you without the 15% tax.  If you hold on for longer than 5 years, your tax goes lower.  (Dont rebuttle about tax deferred accounts).  If you invested in the stock, you obviously think it will beat the overall market, or else you would not have invested in them.  If then normal payout is 1/3 of earnings, think about it as increasing your earnings by 17% (1/3/(1/3*.85).  The company could screw up in so many other ways like buying crappy companies which are worse than the core bussiness.  It happens all the time.  Reinvestment actually gives you more control over the stock YOU CHOOSE, and higher profits.

2) I agree with you about caps.  it is not a well thought out plan regarding dividends, as eventually you will end with a negative cost basis. 

3) anyone who has followed buffet has heard his praise for buybacks over dividends.  Have you read The Essays of Warren Buffett: Lessons for Corporate America?  he clearly says buybacks are better, and if all management did it there would be few shares and ...(gasp) higher price per share.  I read the article as well as some other links on the site, and it seems to me that buffet is condemning the executives of "fraudulent buybacks" not the entire practice.He is always one to stress them importance of management.  There are cases where this strategy will work because of bad execs, but you should not be investing in those companies anyway.  Overall though, the all executives are not from enron.  this is a losing strategy, as shown by the 3,5 and especially 10 year periods on the link YOU provided.

Clearly I am more informed than you by any measurement you want to set up.  Anyone "informed" knows the power of buybacks, and it only makes sense to look to successful names like buffet and lampert (buying back billions of sears) and see their support for it.  You can find all the links you want now about how lampert now hates buybacks, but it doesnt change the facts that the numbers, gurus, and the rest of the investment world are on my side.

I will leave you with that, and I have no intention of wasting any more time on this blog.

Peace - Hibachi0 

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#10) On February 04, 2008 at 11:12 AM, Trunks9 (84.70) wrote:

Wow, you guys need a better lesson in supply and demand.  As demand goes up, price goes up.  As price goes up, demand goes down.  Most companies can't even borrow enough cash to artificially raise their stocks by any meaningful amount.  If the stocks are already undervalued and the CEO has some inside information then he should do a buyback and sell when the price increases which will add a onetime jump in income and show the company is well managed.

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#11) On February 18, 2008 at 5:36 PM, madcowmonkey (< 20) wrote:

Interesting dwot. I was looking at your dwot page when I noticed you green thumbed a stock. I couldn't believe it and I couldn't believe that you didn't give it a pitch. Then I checked out your dwotbuyback and found a thumbsdown. Wewf. So which is it, up, down, or don't really care. I was thankful to see Hibachio0 on this matter though, he kind of gives credit to the entire reason we blog, "no intention of wasting anymore time." Yet we still do. Waste time that is. 

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#12) On March 04, 2008 at 9:21 PM, dwot (99.88) wrote:

madcowmonkey I just put the buy back stocks that were listed in the EFT here and I didn't screen them or compare.

I'm just about ready to get out of my one green stock...

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#13) On March 09, 2008 at 1:08 AM, dwot (99.88) wrote:

Well, I was just looking at these picks.  I only got around to entering data on the first 60 of them, but the 52 week high on them was 37% higher than the price I started at on them.  The S&P was  18% higher the day I started these picks. 

I am losing on my score here, but so far I don't think so on my theory.  I didn't go back and extract what price they were at on the day the S&P peaked.  I don't have the capability to do so without spending hours upon hours.

For these stocks to be that much off their top seems excessive, essentially double the decline of the S&P at the time. 

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#14) On April 19, 2008 at 12:23 AM, dwot (99.88) wrote:

http://www.cfo.com/article.cfm/8099425/c_8102077?f=insidecfo

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#15) On October 26, 2008 at 9:54 AM, btown819 (96.54) wrote:

Interesting portfolio idea and experiment, Dwot.  It will be interesting to see any correlation that may arise over time.

I am glad you mentioned the "revolving door" concept as it applies to employee/executive stock options and share buybacks.  If the company is buying back it's own shares, but then issuing stock options at rate of .80 shares for every share repurchased, that really dilutes the effect of a share buyback.  The shares come in one door and out another, with little net effect to the equity holders.  

I think another thought for people who are pro "share buybacks" is that the business throws off enough free cash flow (FCF) that it can afford to fund share buyback programs.  As you've also mentioned, many of these companies are taking on debt to finance the share buybacks.  If they aren't financing it through excess cash, then the business may not necessarily be a strong generator of FCF.  

Another point that I think needs more focus is the debt funded share buyback programs these companies implement.  I suspect many of these companies take on these types of buybacks while ignoring the theoretical change to the equity cost of capital after taking on so much debt.  In many cases, I'd believe the additional implied equity cost of capital to an enterprise loading up on debt would negate many, if not all, benefits of the share buybacks.

As far as the supply and demand theory goes, buybacks would likely only prop up stock prices short-term.  I think the underlying FCF and ability to consistently buyback stock over long periods of time (without relying on debt funded buybacks) may have a stronger correlation with positive returns.  From what you've mentioned about the number of debt funded buybacks in this portfolio, I'm a little skeptical this portfolio is going to be as effective in beating the market as some people believe. 

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