What happened

Shares of Monster Beverage (NASDAQ:MNST) jumped as much as 6.8% higher on Wednesday following the energy drink maker's renewal and increase of an exhausted share buyback policy. As of 1:50 p.m. EDT, the stock had settled down to a 5.8% gain.

So what

Having used up the old $250 million share repurchase authorization, Monster's board of directors doubled up with a new $500 million policy. The previous buyback program was announced as recently as March 1, 2018. Looking one step further back, another $500 million plan was launched in 2015 and lasted all the way up to this spring.

Rising stock chart superimposed over digital map of the world

Image source: Getty Images.

Now what

If Monster immediately used up the new buyback program, the $500 million action would only retire roughly 2% of the company's outstanding stock. The market reaction today is about three times larger because Monster's leadership is signaling a firm conviction that its stock is undervalued and a great investment at current prices. Therefore, a rapid buyback program is seen as a good use of the company's own cash.

Due to a couple of disappointing earnings reports, the stock is trading just 9% above its 52-week lows today but 26% below yearly highs. Generous buybacks can make sense at these low prices, but only if management sees positive trends behind the scenes that could support a higher valuation. That's what investors are betting on today.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool has a disclosure policy.