Share repurchases have become controversial of late. Proponents point out that the best stocks to invest in often use stock buybacks as a key component of overall shareholder returns. Critics respond that companies usually overpay for their own stock — and in the process ignore much-needed investments.
As usually is the case, the truth is somewhere in the middle. Good companies do buy back stock, in part due to tax code details that make repurchases more efficient than dividends. But managers are surprisingly poor at timing their buybacks: companies usually have more cash at the top of the cycle, and thus pay overheated prices for their own stock.
Stock buybacks, then, aren’t guarantees that a stock will rise, and they can’t create consistent shareholder value on their own. But they can help the process by shrinking the share count (and thus helping earnings per share), buying out marginally interested shareholders and providing consistent demand for the stock.
For these four companies, repurchases are an important part of the bull case … but they aren’t the biggest part, by far. When it comes to repurchases, dividends or valuations, investors looking for the best stocks to invest in can’t focus on a single metric. They need to look at the entire picture — and from that standpoint, these four stocks with big buyback programs look attractive.
Few companies have used stock buybacks more aggressively, or more skillfully, than high-end furniture retailer RH (NYSE:RH). During fiscal 2017 alone (ending February 2018), RH bought back 49.5% of its own shares. The aggressive, debt-funded move squeezed traders who had shorted RH stock, and sent EPS soaring.
And as it turned out, management was right in pegging RH stock as one of the best stocks to invest in: the company on average paid less than $50 per share for a stock that now trades at $119.
Repurchases slowed in 2018, but remain relatively aggressive. Through the first nine months of the year, RH has bought back about 5% of its stock. But going forward, there’s still a nice bull case here, buybacks aside. The company’s expansion strategy continues to be on point. It’s growing nicely despite weakness in the rest of the furniture industry (particularly at the low- to middle-end.) There are still plenty of shorts to squeeze, and RH stock has pulled back of late to a cheap valuation despite a monster Q3 beat.
It’s likely repurchases will begin again after earnings — and it seems likely that RH will again get good value for shareholders, if not quite as much as it did in 2017.
Berkshire Hathaway (BRK.A, BRK.B)
Admittedly, a stock buyback itself isn’t reason to buy Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B). But the fact that Warren Buffett and Charlie Munger have signaled their intention to buy back Berkshire stock certainly seems like a bullish signal.
After all, these are two of the best investors of all time. Historically, they’ve been picky about repurchases, only considering Berkshire stock at a 1.2x multiple to book value. When the company said in July it would be more flexible in buying back shares, it kicked off a multimonth rally: the stock would rise over 15%.
The broad market sell-off has sent the B shares back around $200 — and given discerning investors another opportunity. Berkshire bought back nearly $1 billion in stock in Q3, according to the 10-Q. With the discount to fair value likely even larger after the sell-off, more repurchases are on the way.
And, quite simply, if Buffett and Munger are buying, it’s likely the rest of us should be too.
Despite a tough run of late, I’m still a believer in Micron (NASDAQ:MU). I argued earlier this month that MU stock would find support after earnings, and despite disappointing guidance, that initially appears to be the case.
As I’ve written many times, investors can’t buy Micron stock just because it’s “cheap.” This is a highly cyclical company — and earnings are heading south, as Micron’s own guidance shows. But there is a point when even a cyclical decline is priced in, and it certainly seems like we’re near, if not at, that point.
Micron’s stock buyback program should help on that front. The company repurchased $1.8 billion worth of stock in its fiscal first quarter, but still has $8.2 billion left on its authorization. That’s enough to take out over 20% of current shares outstanding. And with $7 billion-plus in cash and investments on the balance sheet, Micron can be aggressive with the stock under $32.
The combination could support the stock price in the near-term and help EPS growth in coming quarters. But, more importantly, I still believe the buybacks — even at an average price of $40-plus in Q1 — will prove to be good investments. There are reasons why Micron stock has fallen, but there are also reasons, including stock repurchases, why it should be able to rally at some point.
Truthfully, I’m not a huge fan of Apple (NASDAQ:AAPL) stock. The company’s reliance on the iPhone still seems a risk, and the pullback after the launch of the iPhone X shows investors remembering that risk (as historically has been the case). The huge decline after the company cut fiscal Q1 guidance shows that risk has already had an impact on AAPL stock
But the pullback also puts Apple stock at long-term support — and at an attractive valuation. For value investors, there is a potential play here backed by the company’s huge pile of cash. Tax reform opened up a windfall for Apple shareholders, and the company already has repurchased over $200 billion in stock over the past five years.
Apple still has $71 billion left on its repurchase authorization, which now represents around 10% of its market capitalization. And so investors looking to buy AAPL on the dip can be comforted knowing that Apple itself will be doing the same.
As of this writing, Vince Martin has no positions in any securities mentioned.