Shrink! Buybacks of 10 Undervalued Stocks

Stock buybacks are generally considered a bullish signal on Wall Street. They often announce management's belief that its company's stock is cheap, and that the shares will provide its best return on investment. And like dividends, buybacks 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.

Now we'll head over to Motley Fool CAPS to get some insight into the 78,000-strong investor community's preferred picks of these companies. If companies announce stock buybacks, and CAPS' top investors endorse their prospects, Fools should take notice.

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

Company

Buyback Announcement Date

Amount of Buyback

CAPS Rating (out of 5)

Aon (NYSE:AOC)

Dec. 17

$2.6 billion

***

DreamWorks Animation SKG (NYSE:DWA)

Dec. 17

$150 million

***

Terex

Dec. 17

$500 million

*****

Adobe Systems (NASDAQ:ADBE)

Dec. 18

30 million shares

*****

Exelon

Dec. 19

$500 million

****

Holly

Dec. 19

$200 million

****

LookSmart (NASDAQ:LOOK)

Dec. 19

$20 million

NR

Northrop Grumman (NYSE:NOC)

Dec. 20

$2.5 billion

****

Carpenter Technology

Dec. 21

$250 million

*****

Friedman, Billings, Ramsey (NYSE:FBR)

Dec. 21

50 million shares

*

Sources: Company press releases, Motley Fool CAPS. NR = not rated.

Investors at CAPS seem to like this week's group, with only the stock analysts at Friedman, Billings, Ramsey ranking lower than two stars.

A beeline to profits
The buzz for the cartoonists at animation studio DreamWorks is that the Shrek franchise will keep not only the ogre green, but the studio, too. With three wildly successful movies under its belt -- Shrek III was bested only by Shrek II, the largest-grossing animated film ever -- you can expect more Shrek in the future. We've seen the TV special "Shrek the Halls" this holiday season, and Shrek IV is due out sometime in 2010.

Yet the studio's latest effort, Jerry Seinfeld's Bee Movie, is also enjoying a modicum of success. The film has brought DreamWorks a gross in excess of $123 million, according to Box Office Mojo, placing it No. 7 on the studio's best-performing list. With Kung Fu Panda due out next year and a bevy of movies in the wings, you can draw your own conclusions about the success of DreamWorks.

Investors at CAPS certainly are. All-Star TMFselzhanik, with a 92.54 player rating, believes the future films from the Motley Fool Stock Advisor recommendation have great potential, particularly Kung Fu Panda.

First of all, Jack Black playing a [kung-fu] fighting panda bear in a Dreamworks Animation movie alone has Shrek-like potential. But then add the other stars that have signed on to do voices: Jackie Chan, Dustin Hoffman, Lucy Liu, Ian McShane, Angelina Jolie, Michael [Clarke] Duncan ... This should be a blast.

For CAPS investor JamesKellyDawson, the production quality and efforts hark back to another era and another name.

Dreamworks Entertainment is to the newer generation [what] Disney [NYSE: DIS] was for my generation.

Can an ogre, a bee, and a panda do for DreamWorks what a mouse did for Disney? Tell us what you think.

Foolish fallout
Bull or bear, for or against, Motley Fool CAPS is a completely free, fun service where more than 78,000 investors have their say every day. You've heard from your fellow investors; now's your chance. Sign up today and give us your best pitch for why your favorite stock will beat the market.


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