When companies choose to distribute profits to shareholders, they can do so in one of two ways: by doling out dividends, or by buying back their own stock, which increases investor earnings per share (EPS) by decreasing the inventory on the open market. Each method of payout comes with its own shareholder benefits.
Beyond boosting EPS, share repurchases also limit an investor's downside -- no matter how far the stock falls, it always has a built-in pool of buyers. In other words, the further a stock falls, the more likely the company is to buy back its own shares.
Companies that announce buyback programs are also sending a signal to investors that they think their share price is undervalued. Essentially, they're telling Wall Street that they are the very best investment out there.
This is important, since they should be able to gauge their company's value better than anyone else -- they are after all, the experts, and have access to insider information.
The following list of companies have been dragged down by extreme pessimism, but all of these management teams have recently announced plans to buy back their own stock. Investors think these companies are in trouble, but management is telling a different story.
Have investors been underestimating these companies? Whose side are you on? (Click here to access free, interactive tools to analyze these ideas.)
1. Patterson Companies
PDCO Sentiment Analysis: Institutional investors have been dumping PDCO during the current quarter, reducing their holdings by -5.2M shares (representing about 5.41% of the company's float). In addition, options traders seem to be positioning for near-term weakness in the stock. The company's put/call ratio, which measures open interest in options contracts, increased from 0.68 to 0.79 between 03/10/11 and 03/23/11 (a change of 16.18%).
2. JPMorgan Chase
Sentiment Analysis: Options traders seem to be positioning for near-term weakness in JPM, and they've been buying protection against possible losses. The company's put/call ratio, which measures open interest in options contracts, increased from 0.71 to 0.85 between 03/10/11 and 03/23/11 (a change of 19.72%). In addition, analysts have turned bearish on the stock over the last month. The mean rating, sourced from a Reuters survey, changed from 1.62 to 1.65 since 02/21/11 (ratings close to 1 = Strong Buy, while ratings close to 5 = Strong Sell).
3. HCC Insurance Holdings,
Sentiment Analysis: Options traders seem to be positioning for near-term weakness in HCC, and they've been buying protection against possible losses. The company's put/call ratio, which measures open interest in options contracts, increased from 0.36 to 0.65 between 03/10/11 and 03/23/11 (a change of 80.56%). In addition, short-sellers seem to think there's more downside to the stock price. Shares shorted increased from 0.56M to 1.15M between 12/30/10 and 02/28/11 (a change of 590,000 shares, representing about 0.52% of the company's total float). All of the other sentiment indicators tracked by Kapitall are neutral.
4. The Children's Place Retail Stores,
Sentiment Analysis: Institutional investors have been dumping PLCE during the current quarter, reducing their holdings by -2.1M shares (representing about 8.74% of the company's float). In addition, short-sellers seem to think there's more downside to the stock. The short float ratio, or the percentage of a company's shares that have been shorted, increased from 18.35% to 22.7% since 02/28/11 (a change of 4.35%).
5. Wells Fargo & Company
Sentiment Analysis: Wall Street analysts have turned bearish on WFC over the last month. The mean rating, sourced from a Reuters survey, changed from 2.1 to 2.21 since 02/21/11 (ratings close to 1 = Strong Buy, while ratings close to 5 = Strong Sell). In addition, institutional investors appear to be bearish on the stock's outlook, reducing their holdings by -148.1M shares during the current quarter (representing about 3.03% of the company's float).
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen do not own shares of any companies mentioned.