The Next Best (Legal) Thing to Insider Trading

Thursday, October 04, 2018
Tony Sagami

Corporate America is guilty of a lot of bad things — such as their selectivity with the truth and putting their needs above yours. But one thing you can count on is that every move they make is designed to enrich their insiders.

In other words, the primary goal of CEOs, CFOs and boards of directors is to turn their stock options into a mountain of money.

What are those insiders feverishly doing today? Buying back their company stock at a pace that the world has never, ever seen!

The pace at which publicly traded companies are buying back their shares is taking off like a rocket. Goldman Sachs says that S&P 500 companies are spending more cash on share buybacks than anything else.

And that's saying something, since capital spending on things like equipment, research and building factories is up 19%. Buybacks, in comparison, are up 48% from last year!

S&P 500 companies purchased a record $189 billion of their shares in the second quarter of 2018, according to S&P Dow Jones Indices. That is 60% more than the same period a year ago and tops the previous 90-day record of $178 billion.

When was that $178 billion? In the first quarter of 2018!

Corporate Buyback Pie
Think of stock buybacks like heaping the cheese from a large pizza onto a small one. You can make a lot of dough following the "insiders" into these stocks. And this buyback frenzy is only just getting started!

What’s behind this buyback binge? Buybacks reduce a company's total share count, which means profits are spread over fewer shares. That gooses earnings-per-share (EPS) results.

It’s like spreading the same amount of cheese that you'd use on a large pizza over a small one. And everybody knows that the more cheese ... the better the pizza!

OK, here's what really matters: The buyback frenzy is just getting started.

"Given the record earnings, strong cash flow, investor demand and corporate statements, the indications are that the high level will continue for the rest of the year." That's according to Howard Silverblatt of S&P Dow Jones Indices.

Goldman Sachs expects the same. It forecasts that share buybacks will exceed $1 trillion for the full year — something that has never happened before.

Monkey See, Monkey Do

You should consider following the lead of the most aggressive buyback companies. Over the last decade, the top five repurchase zealots spent $689 billion on buybacks. They are:

  • Apple (AAPL): $226.6 billion
  • Microsoft (MSFT): $102.8 billion
  • Cisco (CSCO): $67.9 billion
  • Oracle (ORCL): $67.1 billion
  • JPMorgan Chase (JPM): $62.8 billion

That's over the last 10 years. But I think you can do even better by looking at today's buyback leaders, most of which are technology companies.

https://issues.weissratings.com/uploads/2018/10/share-repurchase.jpg

Technology companies spent $71 billion on stock buybacks in Q2 of 2018, a 13% increase from Q1 and a whopping 159% increase from the second quarter of last year. All total, the tech sector is responsible for 37.5% of all the buybacks last quarter.

Who were these second-quarter spendaholics?

#1: Apple with $21.9 billion

#2 AbbVie (ABBV) at $7.5 billion

#3 Cisco Systems (CSCO) at $6.1 billion

#4 Union Pacific (UNP) at $5.5 billion

#5 Broadcom (AVGO) at $5.4 billion

Of course, nothing in the investment business is guaranteed. But you could have made a mountain of money by following the lead of America's corporate insiders. I believe the odds are high — very high — that doing so will pay off in spades going forward.

Remember — money see, monkey do.

Best wishes,
Tony Sagami

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