Author Topic: Is there 10-15% short-term upside in chasing buy-backs of hated industries?  (Read 1282 times)

DavidVY

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I think the 2012-2015 has been an era of stock buy-backs propelled amongst a record low interest rates.

This financial engineering has propelled prices of stocks to all-time highs.

I bought Corning (GLW) when it was in the low 13s. It was v. cheap at that point- valuing the business at zero. The major catalyst was the stock buy-back, followed by earnings stabilization and continuation of using the FCF to do stock-buybacks. CEO came out and said we are doing stock buybacks because the company is too cheap.

I bought Buckle (BKE) a "dying retailer" in early 2014. It was selling around 12 P/E. FCF was steady. Owner retained almost 30% of the company. Store growth was slow. Every year there was a special dividend, and likely heavy speculation around that time. I sold it for a 25% pop. CEO implied that growth will be minimal, but FCF will likely continue. As such, it was priced as a 8% bond. I sold it around 15 P/E (6.6% bond).

I bought Methanex recently (MEOH). Largest manufacturer of methanol. Earnings got hit by 1) Oil collapse 2) Continued capex from moving a methanol plant from Chile which became fully operational in Q1 2015. The flip is they are uniquely positioned and signed a 10 yr contract to take advantage of low natural gas prices (here in USA and in Canada) which they use to produce methanol. This takes a natural advantage of the spread between world-wide gasoline prices vs. North American natural gas prices.

Its a great story, but they still have to execute it...

They just announced a stock buyback of 5% of market cap (that seems to be the standard % for all CEOs. Guess the # is in vogue now =) ).

I've seen a pattern of positive frenzy for stock buy-backs. The "floor" on stock prices and "increased demand" causes this weird psychological bent in buying.

Greater fool theory or short-term "buy-back" arbitrage for a nimble investor?

Discuss.