Look For Cheap Buyback Stocks In a Frothy Market
We are at a point in the market where investors need to start thinking about valuation more deeply. Growth isn’t enough to outperform the market because valuations are getting so high.
The price-to-earnings multiple of the S&P 500 $S&P 500(.SPX)$ has only been higher than it is today on three occasions — the dot-com bubble, during the Great Recession, and early in COVID.
With prices this high, I’m looking for deals.
What is the market overlooking?
And what stocks are so cheap that management says, “Our stock is so cheap we HAVE to buy it back.”
I’ll talk more about buybacks with Tuesday’s picks, but I wanted to give a couple of examples of great buybacks. And I write this with the 4 reasons stocks go up in mind.
$Oracle(ORCL)$
We don’t think about Oracle as a high-return company, but the stock is up 484% in the past decade before dividends despite just 5.0% compound revenue growth and falling cash flow. But the cash they did generate went to buybacks (and then some), and the P/E multiple rose at a 10.6% compound annual rate.
$Apple(AAPL)$
You may be surprised to learn that Apple’s free cash flow is up just 3.7% on a compound annual basis over the past decade. But the number of shares outstanding fell 4.3% and the P/E multiple expanded 10.2% on a compound basis. Add it up and you get a stock up 541% even before considering dividends.
Overlooked and Unloved
I’m seeing some companies with great balance sheets and low earnings multiples, much like Oracle and Apple a decade ago. And where their management teams are using that value to buy back stock aggressively is where I see opportunities.
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