Shrink! Buybacks of 10 Undervalued Stocks

Stock buybacks generally are 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. With them, we head to Motley Fool CAPS for some insights on the preferred picks of the 75,000-strong investor community. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take notice.

Here are some companies that recently announced share repurchase programs:

Company	Buyback Announcement Date	Amount of Buyback	CAPS Rating (Out of 5)
Metropolitan Life (:MET)	12/3/2007	$2.2 billion	****
International Business Machines (NYSE:IBM)	12/3/2007	$1 billion	***
Discover Financial Services	12/3/2007	$1 billion	***
Electronic Data Systems (NYSE:EDS)	12/4/2007	$1 billion	**
MGM Mirage (NYSE:MGM)	12/5/2007	20 million shares	***
Insteel Industries	12/5/2007	$25 million	***
Cognizant Technology Solutions (:CTSH)	12/6/2007	$100 million	*****
General Dynamics (NYSE:GD)	12/6/2007	10 million shares	****
Celadon	12/6/2007	2 million shares	***
Cheesecake Factory (NASDAQ:CAKE)	12/7/2007	5 million shares	***

Sources: Company press releases, Motley Fool CAPS

The CAPS Advantage
Investors at CAPS generally like this group of companies; only information technology firm Electronic Data Systems ranks less than three stars.

At the other end of the spectrum, however, is another IT firm, Cognizant Technology, which announced it would buy back $100 million worth of stock. At current prices that would equal about 3 million shares, or 1% of its total outstanding stock. Shares of Cognizant have slipped in recent weeks; the company may be experiencing cutbacks many firms are implementing as the economic recession widens its grip. Cognizant tends to think its clients are not cutting back -- but the market looks like it's taking a more sanguine view.

That's what CAPS player bohlmanch thinks and suggests the markets have overreacted to the news.

This magnificent performer is way oversold on minor short term sector news that hardly affects this company. It has proven it can grow revenues and earnings and maintain margins and that it has scalability to maintain strength through fat and lean times. It is very hard to find a company with this strong a history selling at 21 times forward (2008) earnings. Screaming buy ...

That's a view CAPS All-Star cuffllinks can agree with and noted earlier this year that the value-added services Cognizant adopts makes it attractive to him.

Stock has been a good value since 1Q earnings was overreacted to. They cut their hiring plans slightly to achieve higher utilization rates, and higher margins. However growth story continues, and penetration into big customers has still lots of room to run. Real story for me is that they are adding higher value-added services and solutions for biggest clients.

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