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 preferred picks of the 65,000-strong investor community. If companies announce stock buybacks, and CAPS' top investors endorse their future 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 of this group of companies, with three of the five companies earning the highest five-star rating. Only Alaska Air has earned a lowly two-star rating, as investors have undoubtedly taken Warren Buffett's admonition against investing in airline stocks to heart.

Most of them are buying back sizable chunks of stock, however; even independent oil and gas producer Vaalco's $20 million program would total more than 7% of its outstanding shares if they were bought at today's price. At less than $5 per share, the stock might be seen by some rivals as an attractive opportunity, and this offering amounts to a "poison pill" to prevent a takeover of the company.

The largest of the companies here, though not the largest buyback announced, is diversified manufacturer United Technologies. However, if you take into account that the engineering conglomerate has added the above amount to its previously announced $1.5 billion, you're looking at a "real money" $2 billion repurchase plan. But should it spend the money? United Technologies is trading near its 52-week high, so at a P/E of nearly 20, it's expensive relative to itself and in relation to competitors like Boeing (NYSE: BA) and General Dynamics (NYSE: GD).

A year ago, CAPS All-Star F4Phanatic laid out the top-recommended bull pitch for the company by noting that the whole was more than the sum of its parts:

1. Carrier Heating and Air Conditioning - need I say more!
2. Hamilton Sundstrand - manufactures aerospace systems for commercial and military aircraft
3. Otis Elevator - we all probably ride one
4. Pratt & Whitney - aircraft engine manufacturer for commercial and military aircraft, been around forever
5. Sikorsky Helicopter - long established manufacturer of commercial and military helicopters
6. UTC Fire and Security - manufactures and installs fire alarm and suppresion systems, as well as, security alarm systems.
7. UTC Power - manufactures fuel cells for a variety of applications

United Technologies Corporation does all that.

That's what attracted another All-Star, SapphireSeas, who sees the company's broad diversification as virtually bulletproof.

Blue chip multinational conglomerate with strong units arrayed across the market benefiting from economies of scale. Just about as close to "recession proof" as any stock can get.

That's echoed by CAPS player PITTFLASH, who has personally enjoyed great success with a United Tech investment:

Diversity is what UTX is all about! A constant earner for me in 4 years and a split! I have doubled my investment and to me this company is a 5 star rating!!

Winning stocks can certainly continue to win, and United Technologies has managed to put aside many naysayers who were seeing a short case for it earlier this year. Yet when a stock is richly priced, is buying its own stock the best use of shareholder resources?

Foolish fallout
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