Tags: Hulbert | stock | buy | back

Hulbert: It Pays Off to Buy the Stock that Is Bought Back

By Dan Weil   |   Monday, 06 May 2013 12:35 PM

Buying stocks of companies that are buying back their shares represents a winning strategy, says Mark Hulbert, editor of the Hulbert Financial Digest.

"A significant body of academic research has found that the average stock not only rises immediately after the announcement of a repurchase program but continues to outperform the market for several additional years as well," he writes in The Wall Street Journal.

Hulbert cites the performance of Buyback Letter, an investment advisory service as proof. It invests only in stocks of companies that have announced repurchase programs.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Over the past 15 years the newsletter's portfolio has produced an average annualized total return of 9.4 percent, more than double the 4.4 percent return of the Standard & Poor's 500 Index, Hulbert says.

Moreover, the strategy doesn't have a short shelf life, like so many others on Wall Street, Hulbert notes.

Although a company announces it will buy back its shares, that doesn't mean it will actually follow through. That means investors must wait for the firm's quarterly filings to see if the company really did repurchase shares.

David Ikenberry, dean of the University of Colorado business school, determined that "the average buyback stock outperforms the market in each of the four years following the company's announcement of its share-repurchase program," Hulbert writes.

However, money manager Pacifica Partners warns that buybacks aren't always what they're made out to be. "Too often, great excitement is generated by an announced buyback," the firm writes on its blog.

"What investors need to remember is that an announcement is an intention — not a promise — to buy back stock. According to data from Standard & Poor's, of the 317 companies that repurchased shares in Q4 2012, only 98 actually reduced their share count."

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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