Why Are Stocks Up? It All Goes Back to Simple Supply and Demand!
Why are stocks up? Market observers will point to several traditional rally catalysts. We’re in good shape economically. Tax reform and repatriation of corporate profits are on the table. Earnings growth is healthy.
Plus, as my colleague Sean Brodrick and our company founder Martin D. Weiss have been saying, we have a flood of foreign capital looking for a safer, more secure home in our deep, highly liquid markets.
But the biggest factor is a simple one that many investors overlook – supply and demand. That’s right – supply and demand.
To understand where I’m going with this, consider that earnings have been proven to be the most significant stock market driver over the long haul. And the most important way to measure profits is on an earnings-per-share basis.
Companies can boost their EPS by growing underlying profits organically or by boosting profit margins. But beneath the surface, they can also be “engineered” by a company buying back stock. In other words, even if a company generates the same earnings in two comparable periods, it can report a greater EPS number by purchasing its own shares to reduce the amount outstanding.
That not only makes EPS figures look better on the surface. It also shrinks the overall number of shares available in the market as a whole. And that’s what has been happening this year. Meanwhile, thanks in part to lower stock supply from IPOs, there are fewer new shares out there to sop up investor demand.
Bottom line: Investors are demanding more stock, encouraged by a growing economy, strong earnings, a favorable tax and regulatory environment, and more. But the supply of stock isn’t rising. Ergo, prices are going up!
To help you take advantage of those trends, I ran a screen of “A” (BUY) rated U.S. companies that pass our normal liquidity filters (Market cap must be in excess of $50 million and 30-day average volume must top 50,000 shares per day). Then I isolated those companies that have reduced their share counts since the beginning of the year by at least 1%.
Here’s the resulting list, ranked from highest-to-lowest Weiss Rating:
You’ll notice that most of these names are larger, successful, globally oriented companies. If current economic and earnings trends continue, these companies should continue to lead the way higher, just based on the impact of good old-fashioned supply and demand. Happy hunting!
Small Cap Edition, By Mandeep Rai, Senior Analyst
Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.