A Foolish reader asked, "I know market downturns benefit people buying stock, because falling prices are like sales. But, what about people just holding stock? Is there any possible benefit for us?" The answer is... yup. One way is through company stock buybacks. Imagine that the stock of PomPom.com (ticker: POMPOM), an online cheerleader-supply firm, is fairly priced and trading around $68 per share. Then the market drops suddenly and POMPOM shares drop to $56. If the company has a pile of cash on hand, it can choose to buy back some of its own shares on the open market. Doing so will signal that it considers its stock undervalued and inexpensive. It will also please shareholders, as it will boost the share price.
Share buybacks often help raise a depressed stock's price. But keep in mind that it isn't a sure thing. Because the purchased shares are essentially retired, each remaining share represents a greater fraction of ownership in the company. On the other hand, the company just spent cold hard cash for those shares, so it has fewer assets left after the buyback. These effects tend to offset each other, but if your company's growth prospects are good, then you may benefit more from your bigger share of the company stock.
Of course, prudent management needs to make sure it's investing its cash as effectively as possible. It might be more profitable in the long run to use money to build more factories or acquire another company. And if a stock is overvalued, buying back shares isn't the smartest thing to do -- simply paying cash out to shareholders as a dividend might be better, in that case. But many companies have announced new or extended buyback programs recently, and you can count on ongoing buybacks from many more.
Stock buybacks are just one factor to consider in choosing a good investment. For proven advice from the Founding Fools themselves, tune in to Motley Fool Stock Advisor each month. You'll get recommendations that have the Gardners' stamp of approval. See what Stock Advisor can offer you for 30 days free.
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