5 Undervalued Stocks Getting Bought Back

Stock buybacks are generally considered a bullish signal on Wall Street. They often announce management's belief that its stock is cheap, and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.

How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.

We're seeking companies that have announced stock buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the 65,000-strong investor community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take note.

Here are some of the latest companies to announce share repurchase programs.

The CAPS Advantage
Investors at CAPS seem to have a pretty good opinion about this group of companies announcing buyback programs, with three of the five earning the highest four- and five-star ratings. Only Move, the Internet real-estate listings and information provider, has earned a lowly one-star rating, as investors are undoubtedly still leery of anything connected to housing.

Outsourced IT provider Cognizant Technology has been active in the past week, seemingly trying to unlock shareholder value at every turn. While it has announced a sizeable $100 million buyback plan, Cognizant has also announced a 2-for-1 stock split. As Fools know, the one won't have any impact on the other, and stock splits -- while meaningless from an investment standpoint -- tend to underscore management's bullish sentiment.

The other five-star company engaging in a buyback is oilfield service and equipment supplier Superior Energy, which specializes in meeting the needs of companies operating in the Gulf of Mexico. Yet the last quarter marked the first time that more than 50% of its revenue came from outside the Gulf. Over the past year, the stock has enjoyed strong growth, as high oil prices have kept the oil companies busy drilling for the black gold. That has enabled Superior to keep itself busy too, significantly boosting revenue.

CAPS All-Star jester112358, with a 99.34 player rating, believes that industry risk has been minimized thanks to a period of high oil prices that have smoothed out cyclicality:

It has finally dawned on the market that energy is no longer cyclical, so buy this sector while you still can. Scientists have known this for a least a decade, but no one ever listens to us! The low P/Es in this sector are unbelievable, giving very little downside risk.

That's what attracted another All-Star, tuffsledding, who sees unrelenting demand for oil and the companies that provide services to the industry.

Oil will continue to get harder and harder to find. Alternative energy is still way in the future, no sign of flagging demand for petroleum.

More than 400 investors have weighed in on Superior Energy, and 99% see the company as outperforming the market. More than 40% of those who've rated Superior are considered All-Stars, and they also have similar confidence in that company being the one to beat.

Foolish fallout
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