2 Stocks That Are Wasting Your Money

Your company's buying back stock? Hurray! Or should that be "boo"?

According to research conducted by Boston University finance professor Allen Michel, when a company announces it's buying back stock, that stock tends to outperform the market by about 2% to 4% more than it otherwise would have over the ensuing six months.

But over the long term, multiple studies argue that buybacks destroy shareholder value. As the Financial Times recently put it: "the implied returns over a period from buy-backs by big companies would have been laughed out of the boardroom if they had been proposed for investment in ... conventional projects."

So why do buybacks at all? According to FT, management can use them to goose per-share earnings, which has an obvious benefit for company executives who get compensated based on earnings. In addition, the investment banks that organize and execute buybacks for management also get fees and other income from promoting buybacks. As for you and me, though, we miss out on gains unless those purchases cost less than the actual intrinsic value of the shares.

Meanwhile, here in the U.S., CNBC pundit Jim Cramer has blasted how big banks such as Bank of America bought back shares in 2007-2008 -- just before their stocks fell off a cliff. Cramer dismisses the concept of buybacks as buy signals, calling them "a false sign of health ... and often a waste of shareholders' money."

Unfortunately, several of the worst buyback offenders are at it again.

Two bad buybacks
Every weekday, the market sleuths at StreetInsider.com keep a running tally of which companies are buying back stock, and how much they're spending on the efforts. SI is too polite to accuse the companies of actually wasting shareholders' money, of course -- but I'm not. With SI's help, I've come up with two examples of popular stocks that I believe are squandering shareholder dollars on badly timed buybacks ... and one that isn't.

Travelzoo (Nasdaq: TZOO  )
The first catcall this week goes out to travel-deals website Travelzoo. On Monday, the company responded to a 60% deep, four-month-long sell-off in its stock by announcing that it intends to repurchase 500,000 of those shares on the open market. Travelzoo certainly has the cash it needs to pull off the buyback -- but it shouldn't pull the trigger.

Unprofitable and selling for four times sales, Travelzoo shares look woefully overpriced. While it's true that peer websites like priceline.com (Nasdaq: PCLN  ) and Ctrip.com (Nasdaq: CTRP  ) sell for higher multiples to sales than Travelzoo does, those companies actually earn profits from their businesses.

TiVo (Nasdaq: TIVO  )
Speaking of money-losers. TiVo just reported a loss in its fiscal second quarter. The loss was smaller than expected, however, which sparked a 17% rally in the stock yesterday. Hoping to add fuel to the fire, TiVo followed its "earnings" news with an announcement that it's spending $100 million to buy back stock. Alas, its timing couldn't be worse.

Right now, TiVo's up-again, down-again earnings history makes the stock look as if it belongs to a profitable company. Don't be deceived. As early as next year, analysts expect TiVo to return to its money-losing ways. While it's certainly possible that the year after that, TiVo will be back in the black again, I wouldn't bet on it. Formerly a pioneer, TiVo's groundbreaking DVR business has already been commoditized by larger, better-funded rivals like Cisco (Nasdaq: CSCO  ) . Now, Google's (Nasdaq: GOOG  ) acquisition of Motorola, and the prospect of its taking Google TV mainstream, has added a second major threat to TiVo's business.

If TiVo's still got cash handy, it shouldn't be wasting it on buybacks. It should stockpile those greenbacks for the battle ahead.

A better use of cash
Speaking of better uses of cash, I don't want to end this column on a down note, and I did promise to tell you about one buyback program I actually like. That would be Lockheed Martin's (NYSE: LMT  ) announcement that it's raising its repurchase authorization to $1 billion, after having nearly exhausted the funds from its previous repurchase.

Lockheed sells for just 9 times earnings. It's also expected to grow more than 9.5% per year over the next half-decade. The company already pays a generous dividend of more than 4%. Best of all, its growth, dividend, and future as a business all look secure, since Lockheed will be building F-35 fighter jets for the Pentagon for decades to come. Unlike TiVo and Travelzoo, I think this stock's a steal.

Will TiVo and Travelzoo tumble? Will Lockheed Martin soar? Add all three stocks to your Fool Watchlist, and find out.

The Motley Fool owns shares of Bank of America, Lockheed Martin, Ctrip.com, and Google. The Fool owns shares of and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of priceline.com, Google, Travelzoo, Ctrip.com, and Cisco.

Fool contributor Rich Smith owns shares of Google. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 26, 2011, at 12:16 PM, Domeyrock wrote:

    Travelzoo NOT profitable?? Where do you get your information from?? TravelZoo's revenue grew 34% year over year. Subscriber growth surpased 24 MILLION! Check your facts guy, listen to conference call once in a while.

  • Report this Comment On August 26, 2011, at 1:14 PM, teamonfuego wrote:

    a $20 Million one time charge related to merger issues back in 2002 caused EPS for TZOO to take a hit...otherwise TTM EPS is $1.12

  • Report this Comment On August 26, 2011, at 1:52 PM, lifeguard446 wrote:

    If you read just a little more about the Tivo buyback and some of the news associated with it you would have noticed the buyback was announced more than a week before the earnings, not after. When it was announced it was hailed as a smart thing as the markets were in free fall. Several other companies followed Tivo with similar announcements.

    Also you would have noticed Tivo announced it is authorized to buyback 100 million in stock, but it doesn't have to buyback. If it thinks the price of the stock is too low it can buyback, i.e. it can buy on dips.

    As for their business, their partners are ramping and partner subscriptions are growing (e.g., Virgin added 50k subs). With the announcement that DirecTV is in production and and the expectation that they will launch their Tivo DVR soon, their subscription growth should rise substantially (given DirecTV has been the source of their largest losses in the last few years). That together with the expectations that their patent infringement lawsuits against ATT and Verizon will end the same way as the Dish infringement suit (Tivo received 500 million) are likely what is driving the stock these last few days.

  • Report this Comment On August 26, 2011, at 2:25 PM, randlem wrote:

    Although you may be right that buybacks, in general, are a bad thing, you really should do your research before posting about specific companies.

    Not only do you completely miss the fact that TiVo currently has over 50% of their market cap IN CASH; at the time they announced the buyback was approved, it was 75% of their market cap, IN CASH. The market was basically valuing their long-term business at next to nil. With returns on cash at 0.0%, and absent any near-term need, a buyack is an EXCELLENT use of the cash. Especially when the short interest on the stock is so huge and the company strongly believes they are ready for a pop.

    In addition, if you look at the long-term history of TiVo management understanding the true value of their stock, they have an excellent track record. They have placed multiple additional shelf offerings at between 10-25% OVER the 6-month stock price both before and after the offering. They understand where the true market value of their business is far better than the street, who just loves to hate TiVo (the company).

  • Report this Comment On August 26, 2011, at 5:10 PM, brewersfan81 wrote:

    Hmmmm-

    I'd have to agree with the first two commenters. The charge that they are referring to with TZOO was a one-time settlement with the state of Delaware for $20 million that I believe goes all the way back to when they IPO'd.

    When you back this out, they earned $1.12 per share over the past twelve months. As mentioned above, their recent growth rate y-o-y in earnings was 34%. Given that they have a P/E of 29.8 (backing out the one-time charge), I think the buyback makes a lot of sense.

  • Report this Comment On August 31, 2011, at 12:19 PM, NoteInvest wrote:

    Travelzoo: I am a newbie based in Europe and I am dismayed to see the following report from live-PR

    http://www.live-pr.com/en/travelzoo-inc-under-long-term-inve...

    An investigation on behalf of current long term investors of Travelzoo Inc. (NASDAQ: TZOO) over possible breaches of fiduciary duties by certain directors and officers of Travelzoo was announced.

    If you are purchased shares of Travelzoo Inc. (NASDAQ: TZOO) prior to April 2011 and presently continue to hold those NASDAQ TZOO shares, you have certain options and you should contact the

     

    Shareholders Foundation at mail@shareholdersfoundation.com or call +1(858) 779 - 1554.

    The investigation for investors who purchased their TZOO shares prior to April 2011 and current hold those TZOO shares follows a lawsuit filed for only investors who purchased TZOO common stock between the time frame of April 21, 2011 and July 21, 2011.

    The investigation by a law firm on behalf of current long term investors in stock Travelzoo Inc. (NASDAQ: TZOO) concerns whether certain current and/or former officers and members of the Travelzoo board of directors can be held liable in connection with the alleged Securities Laws violations in the lawsuit by investors who purchased TZOO stock only between April 21, 2011 and July 21, 2011. According to that complaint filed in the U.S. District Court for the Southern District of New York the plaintiff alleges that Travelzoo Inc violated specifically the Securities Exchange Act of 1934 by issuing a series of allegedly materially false and misleading statements.

    Travelzoo’s annual Total Revenue rose from $78.90million for 2007 to $112.78million in 2010 and its Net Income increased from $9.11million for 2007, respectively a Net Loss of $4.12million for 2008 to a Net Income of $13.16million in 2010.

    Shares of Travelzoo Inc. (Public, NASDAQ:TZOO) rose from as low as $4.23 in January 2009 to as high as $94.22 per share on April 21, 2011 and $87.79 per share on July 19, 2011.

    Then on July 21, 2011, Travelzoo Inc. reported its second quarter 2011 Results. Even though Travelzoo’s second quarter Revenue increased from its first quarter Revenue 2011 of $36.96million and compared to its second quarter Revenue of $28.11million last year to a second quarter 2011 Revenue of $37.56million, Travelzoo Inc. reported earnings per share of $0.30, well below analysts' expectations of $0.39 per share.

    Shares of Travelzoo Inc. (Public, NASDAQ:TZOO) fell from a close of $85.71 on July 20, 2011 to a close of $56 on July 21, 2011. Since then TZOO stocks fell to a close of $32.55 on August, 19, 2011.

    Those who purchased Travelzoo Inc. (NASDAQ: TZOO) shares prior to April 2011 and presently continue to hold those NASDAQ TZOO shares, have certain options and should contact the Shareholders Foundation.

    Press Information:
Shareholders Foundation, Inc.

3111 Camino Del Rio North - Suite 423
92108 San Diego

Contact Person:
Trevor Allen
General Manager
Phone: +1-(858)-779-1554
eMail: eMail

Web: http://www.ShareholdersFoundation.com



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