3 Buyback-Happy Stocks to Avoid – IBM, HLF, NTDOY

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You can’t help but wonder if the $750 billion in share buybacks in 2013 is an ominous sign of a crisis to come like it was in 2007, just prior to the financial collapse.

It’s one thing for a few cash-rich companies to reward investors by boosting share values when stocks are underperforming. But it is a whole different story when buybacks en masse skew numbers and artificially inflate entire indices.

The 30 companies that comprise the DJIA authorized $211 billion in buybacks, boosting the index to levels similar to the tech boom in the late 1990s. And companies in the S&P 500 index posted revenue growth of 3.5% in third quarter of 2013. Yet earnings per share for these S&P companies rose by 5.7% during the quarter, according to a Reuters report. It’s hard to know what is real and what is facade.

For the most part, buybacks are designed to reward shareholders. But beware. They can also be cover ups for underlying corporate snafus or problems in the product pipeline.

Here are three companies that might be buying back shares for the wrong reasons, and should be viewed as stocks to avoid

Herbalife

herbalife185Herbalife (HLF) recently announced a 50% boost in share buybacks to $1.5 billion and a $1 billion sale of convertible bonds to fund it.

Herbalife is rewarding shareholders after auditor PricewaterhouseCoopers gave the nutrition company a clean bill of health, clearing the way for additional loans to fund stock repurchasing.

But the company has some big problems. Hedge fund manager Bill Ackman of Pershing Square Management has made repeated allegations about unethical practices among Herbalife’s distributors. Ackman called the business “a pyramid scheme.”

Ackman has urged regulators to investigate the company for questionable business practices, and some did just that. The New York Post reported that Canada has launched a probe into Herbalife’s business model; U.S. Senator Ed Markey wrote a letter to the FTC, urging it to investigate Herbalife, among others.

IBM

ibm-stockIBM (IBM) announced an increase ($15 billion) in its buyback program shortly after a not-so-great earnings report—a sixth straight quarter of declining sales. Shares rose 2.7% on the buyback news, but Big Blue remains in the red 1% so far this year.

IBM and other enterprise tech behemoths are experiencing financial withdrawal from flailing emerging markets and have had to depend on sales in the U.S. IBM does not anticipate demand in China to pick up until after the first quarter of 2014. The lack of demand from Chinese customers contributed to 75% of IBM’s revenue decline last quarter. The company just laid off 50 workers in India, part of a plan to reduce the global workforce by 10,500.

The $189.1 billion company has been the master of reinventing itself for years. But a huge number of disruptive start-ups and IPOs have created even stiffer competition for IBM.

Clearly, IBM knows that it needs to be more of a force in cloud technology and place less emphasis on old-school products to be successful. It doesn’t appear that a lucrative buyback program is enough in the short term.

Nintendo

Nintendo 3DS

When a company like Nintendo (NTDOY) with a $1.8 billion market cap buys back nearly 7.8% of outstanding shares — worth $1.2 billion — you know there’s trouble brewing.

The move came shortly after the death of long-time company leader Hiroshi Yamauchi. Then came a forecast that slashed its global Wii U sales through March 31 by nearly 70%. Nintendo shares are down 9.7% year-to-date, and President Satoru Iwatu is taking extreme measures to revive the company, and he took a 50% cut in pay.

The video game manufacturer is trying to stay competitive with Sony’s (SNE) and Microsoft’s (MSFT) faster consoles. Iwatu is hinting at new tricks up his sleeve in what he calls the “quality of life” business. Much like the early Wii games that were applauded for calorie-burning activities, the new venture may focus on diet and exercise applications. However, he may just need a miracle to bring Nintendo back to life.

China has temporarily lifted its 13-year ban on game consoles, opening up a $10 billion market for players in the video game industry. Shares of NTDOY rose 10.8%, and to their highest level in two years, after that news hit the street on Jan. 6. But there’s no word on how long the edict will remain that way.

Written by Karen Ricci


Article printed from InvestorPlace Media, https://investorplace.com/2014/02/stocks-to-avoid-ntdoy-ibm-hlf/.

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