Buybacks of 5 Undervalued Stocks

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 the 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 a company announces stock buybacks, and CAPS' top investors endorse its prospects, Fools should take notice.

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, with three of the five earning the highest four- and five-star ratings.

Although investors have given their highest favor to insurer MetLife and oil producer Chevron, I find Bed Bath & Beyond, a home furnishings retailer, to be most interesting here.

After missing earnings for the first time in 15 years back in June, the retailer bounced back and met expectations last month. Second-quarter sales were up 10%, comps rose 2.2%, and earnings were up 8% over last year. While it's admittedly a rather lukewarm performance compared to what we've become accustomed to, it still should be considered an achievement, since almost every other business with even a tangential relationship to housing has turned in subpar results.

Yet there's no question the company faces challenges. While it produces prodigious amounts of cash -- free cash flow is up for the first six months, though down from last year in the latest quarter -- margins are still sliding and it's facing new competition from Martha Stewart Living Omnimedia  (NYSE:MSO), which has unveiled a new line at Macy's, directly competing with Bed Bath's offerings. The home style diva is giving herself more of a platform to expand by branching out from her down-market affiliation with Sears Holdings' (NASDAQ:SHLD) Kmart stores. And that's a shot across the bow of Bed Bath & Beyond.

Despite that, CAPS All-Star StockSpreadsheet sees the strong fundamentals underlying Bed Bath & Beyond allowing it to stay ahead of the competition.

Average annual sales growth of 14% over last 3 years. Average annual EPS growth of 13% over last 2 years. Pre-tax profit has remained fairly stead at around 15% over the last 4 years. Their EPS/book value has stayed fairly steady at around 21% over the last 5 years. They have NO DEBT!!!, which is very good. Their current P/E is below their trailing 3 year and 5 year averages, which is good as it could put upwards pressure on the stock price due to multiple expansion.

... With their low debt load, (zero debt), I would hope they would consider instituting a dividend in the future, but you can't count on this hope. The trailing 2 year average PEG ratio is a fairly high 1.21, so this stock is not cheap on a PEG basis. I think the stock could be worth $97.00 in five years, or about three times its current price of $36.00. ... I think this stock is a buy.

Foolish fallout
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