Inexperienced investors are often so wrapped up in the potential upside of their holdings that they completely forget about the downside, or what might go wrong. But you won't see pros making one rookie mistake.

In terms of strategy, this means that the pros take the polar opposite approach to the newbies: They spend a good deal more time weighing the factors that may drag down their investments than daydreaming about how they're going to spend their profits.

One good way to protect your downside is to invest in companies that have a buyback program in place. These companies can invest in themselves by purchasing their own shares on the open market, thereby reducing the supply of shares and boosting prices for existing stock.

If management is willing to buy back shares, they clearly think the stock is undervalued. Plus, no matter how much the stock falls, they will always be buyers, limiting the downside.

Check out this list of companies that have recently announced buyback plans and are more efficient than their industry competitors. We determined efficiency according to the following criteria:

  • Trailing-12-Month (TTM) Revenue Per Employee: A company's sales over the past year in relation to the number of employees. The higher the ratio, the more efficient the company.
  • Receivables Turnover: A measure of a firm's effectiveness in extending credit and collecting debts.
  • Asset Turnover Ratios: Amount of sales generated for every dollar of assets.

Industry comparison data sourced from Reuters.com. For an interactive version of this report, click here.

Company

Buyback

Revenue Per Employee (TTM)

Inventory Turnover (TTM)

Asset Turnover (TTM)

RadioShack (NYSE: RSH)

Recently increased share buybacks to $500M, representing about 20% of its market cap

$125,325 vs. industry avg. of $24,770

3.82 vs. industry avg. of 0.57

1.88 vs. industry avg. of 0.09

Central Garden & Pet (Nasdaq: CENT)

Announced a share buyback program of $100M, representing 16.5% of its market cap

$394,828 vs. industry avg. of $145,463

3.26 vs. industry avg. of 0.53

1.29 vs. industry avg. of 0.18

L-3 Communications (Nasdaq: LLL)

Recently announced a buyback program of $1.0B, representing 12.5% of its market cap

$236,970 vs. industry avg. of $206,740

N/A

1.02 vs. industry avg. of 0.48

Northrop Grumman (NYSE: NOC)

Announced a buyback of $2.0B, represents about 11.5% of its market cap

$280,978 vs. industry avg. of $206,740

N/A

1.13 vs. industry avg. of 0.48

GameStop (NYSE: GME)

Recently announced its second $300M share buyback this year, representing about 10.3% of its market cap

$543.561 vs. industry avg. of $24,770

6.06 vs. industry avg. of 0.57

2.14 vs. industry avg. of 0.09

Interactive Chart: Press Play to see how analyst ratings on these stocks have changed over the last two years.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any company mentioned.

Motley Fool Options has recommended writing covered calls on GameStop. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.