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 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, as 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 75,000-strong investor community's preferred picks. 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 not to have a very high opinion of this group of companies announcing buyback programs, as all but three have garnered three stars or less.

One of those "middling" three-star stocks is discount retailer Target. Undoubtedly, it's feeling the effects of analyst sentiment of a not so holly jolly Christmas season, although the store is trying to exploit some "wow" factor. Nearly 1,300 investors have rated Target, and 93% of them are still wowed enough by the retailer's prospects to rate it an "outperform." That includes CAPS player GS751, who presciently saw the company's depressed values as ripe for a buyback:

Sell credit card division with possibility of buyback. They own a lot of their real estate could get creative. Have a low multiple. Possible buyback that they could review at the end of the year. Could be down 5 but will ride it out. I like Crammers recommendation. I am buying retail when people don't like it, thats when you buy when things are beat down. TGT will be around in the future. P/S of .81 not as low as I like but not bad. I think this and COST are great buys right now. I am buying them in the real portfolio.

CAPS All-Star DLGarrison with a 96.96 player rating sees Target as part of the concept of "buy what you know," since shopping at the Bull's Eye has "mystical" qualities about it.

Target is a component of my """Minneapolis portfolio""" as well as one of my Peter Lynch """buy what you know""" stocks. The case for owning this company includes:

(1) Shopping in the stores has become a mystical experience for many shoppers, meaning "going to Target" is not a chore, it's a way of life.
(2) The company has a knack for hiring top flight retail talent. The staffing profile tends to be young and enthusiastic.
(3) Despite recent reduced same-store guidance, Target will still be a primary holiday shopping destination for consumers on a tight budget. The stores stock inexpensive quality rather than cheap junk.
(4) The company still expects to increase its presence by 25% over the next five years to about 2,000 stores.

Go long on this one, as it's unlikely you'll lose.

Foolish fallout
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