Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
Today, we'll find a few companies that announced new or expanded stock buyback programs and then consult Motley Fool CAPS to see which of those companies the 180,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, maybe Fools should take notice.
Here are two of the latest companies to announce share repurchase programs over the last month:
CAPS Rating (out of 5)
New or Expanded
Qihoo 360 Technology
Six Flags Entertainment
Sources: Yahoo! Finance, Motley Fool CAPS.
But don't forget, Fools -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use this list as a reason to buy by itself; rather, use it as a launching pad for additional research.
Getting the message
The internecine war that broke out last year between Qihoo 360 Technology and SMS messaging rival Tencent has spawned new regulations that may affect how both are able to grow in the future, but it may affect the former more so than the latter.
Qihoo's antivirus software is designed to erase unnecessary plug-ins on a user's desktop, which apparently included Tencent's messaging plug-ins. As a result, Tencent suspended the accounts of users that had Qihoo's software installed. While there's some benefit to streamlining all the little programs companies install themselves on your computer, considering the allegations that Qihoo's CEO was a malware provider in the past, it didn't help Qihoo's standing. It was actually one of the attacks that research firm Citron Research used against Qihoo when calling it "the most overvalued and misunderstood Chinese Internet stock." Citron also doubted its claims of being the third most popular website in China, while Qihoo argued that since it's a desktop application, it wouldn't show up in website hit figures the way search giant Baidu.com
The Chinese government has now issued new regulations to prevent companies from violating the "legal rights and interests" of other online service providers, including "maliciously" interfering with their services on a user's device. To me, that seems aimed more at Qihoo than it does at Tencent.
Betting against Qihoo has proved a profitable strategy, as its shares crumbled under the weight of accusation, falling more than 60% from their highs. Nearly four out of five CAPS All-Stars think it won't be able to outperform the market, either.
Tell us on the Qihoo 360 Technology CAPS page whether you think the weight of the world is against it, and then add the stock to your watchlist to see whether the buyback turns into money well spent or a waste of shareholder resources.
Debt's a four-letter word
I wasn't a fan of it when Microsoft
As I noted back then, there are valid reasons for taking on debt for corporate purposes, even when it comes to buying back stock or paying dividends. Mr. Softy's cash hoard makes it easy to make the payments. In contrast, Six Flags has nearly $1 billion in long-term debt and just a third of that amount in cash. It refinanced its debt to save $13 million a year (a quarter of its annual interest costs) but will now apparently use part of that money to buy back shares -- even though the stock is already trading near its 52-week high.
Although management might be trying to signal that it's confident in its future, rivals Cedar Fair and Great Wolf Resorts didn't have nearly the same problems that Six Flags did in attracting people to their parks and in fact saw revenues and attendance hit record levels.
I noted last time I had marked Six Flags on CAPS for outperformance, believing its stronger numbers (and stock split!) was an indication of better things to come. While that may still be the case, I think using borrowed money to buy back shares as it's doing is not the right decision, so I've closed out my pick with a small gain.
Sign up for CAPS today and share your best pitch for why a company's share buybacks are a reason for you to buy, too -- or not!
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Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Baidu and Microsoft, as well as creating a bull call spread position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.