Tags: TrimTabs | Biderman | gold | buybacks

TrimTabs’ Biderman: Buy Gold and Companies with Shrinking Corporate Float

By John Morgan   |   Thursday, 21 Mar 2013 08:03 AM

TrimTabs founder Charles Biderman recommends what he believes are two prudent investments for an uncertain world — buy gold and buy stocks in companies that are shrinking their floats through buybacks.

His bullish gold call in inspired by the belief that much of the developed world — notably Japan, Europe and the United States — is stuck in the same spiral of dead-end economic policies.

“Therefore, in a world where the major economies are debasing their currencies to pay bills and with no hope for real growth anytime soon, gold is the best play for the longer term,” Biderman wrote on his blog.

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However, even if major governments fall, Biderman said their underlying economies are structurally sound. And some companies within those countries remain strong.

For that reason, Biderman suggests also buying portfolios of companies that are reducing the trading float of their shares via buybacks and that are using their free cash flow to do so.

Statistics prove out his thesis, he noted.

While most investors know dividends and buybacks are the two avenues public companies use to distribute profits to investors, fewer know Standard & Poor’s 500 companies paid out more through share repurchases than dividends in eight of the past 10 years, he explained.

“On average, the money they spent on buybacks was 50 percent higher than the amount spent on dividends,” Biderman wrote.

“I am amazed that instead of float shrinks many investors are obsessed with high dividend yields.”

The stocks of companies that shrink their float using free cash flow tend to rise more than do companies that use the same amount of cash to pay dividends, according to Biderman.

The combination of gold as protection against central bank policies and a float shrink equity strategy can help even retirees profitably diversify their portfolios, Biderman maintained.

According to data from Birinyi Associates, stock buybacks hit an all-time high in February.

When a company buys back its shares, in effect it lets some shareholders cash out and leaves the remaining shareholders with a scarcer — and therefore more valuable — asset, Slate reported.

“When stocks are cheap, firms buy shares. When stocks are expensive, they buy capital goods,” Slate said.

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