Pacifica Partners’ Financial Post Weekly Column – Sept 25th 2009
In the last several weeks there have been many reports on the lack of buying by the insiders of publicly traded companies. Insiders are typically company executives or members of the Board of Directors. Insider sales and purchases are watched by some investors under the assumption that who else would have better insight into the future direction of a company than the people that run it.The general rule is that if insiders are buying that is a bullish event and if they are selling stock then that is a reason for caution. At face value, that is a reasonable assumption.Investors like seeing conviction by management in their company’s future stock price.
Taking it one step further, we should also look at the data pertaining to stock buybacks – in which companies sometimes buy back their own stock because they deem it to be undervalued. Again the argument is the same – who better to know the value of a company’s stock than its management. The buyback data is quite underwhelming so far this year. In the US, second quarter data shows that buybacks were 86% lower than in 2007. Exxon was the biggest buyer as it bought $5.2 billion of its own stock (20% of total SP500 buybacks) in the second quarter and Wal Mart was second with a repurchase of $1.9 billion. Given that these two metrics have fallen sharply, should this be construed as being negative for the markets going forward. At this point, we would have to say “not particularly”. The chart below shows the ten largest company stock buybacks from Q4 2004 to Q2 2009. We can see that there is no particular relationship between the stock buyback and share performance. If this decade has been driven by commodity stocks, it may surprise an investor to see that McDonald’s and Hewlett Packard were the best performing stocks even though Exxon bought over 2.5 times more of its stock than the second largest buyback company (IBM).
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This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance.Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.
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