10 Small-Cap Stocks With Aggressive Buyback Plans

10 Small-Cap Stocks With Aggressive Buyback PlansIf every era of investing can be characterized by a few select themes, then the current one can surely be noted by a stunning rise in corporate cash balances. Many companies have spent the past few years in cash-generating mode, yet they have seen few opportunities to invest that cash into acquisitions or stepped-up capital spending. As a result, with ever-rising cash balances, many of these firms are looking to re-acquire their own company stock.

Earlier this month, I profiled 10 mid-cap and large-cap companies that had recently announced plans for major stock buybacks.

Since then, as earnings season has progressed, a number of smaller firms have followed suit. A few dozen companies have announced new (or extended) buyback plans, and these 10 aim to acquire more than 10% of shares outstanding.

10 Small-Cap Stocks With Aggressive Buyback Plans

Not all buybacks make clear sense. In an ideal world, a company should be buying shares when the stock trades below book value, sports a very low forward multiple, or at least has come tumbling down from its 52-week high. So should you ignore stocks like Calgon Carbon Corporation (NYSE:CCC), a provider of environmental remediation equipment, simply because it trades for nearly two times book and more than 15 times projected 2013 profits? Not necessarily.

I’ve written in the past that this company is poised for rising demand as air and water quality regulations tighten. Insiders, several of whom bought shares late in the summer when they traded above current levels, are surely bullish. But this isn’t what I’d call a “no-brainer buyback stock.”

The three “no-brainers” in this group: Tellabs, Inc. (NASDAQ:TLAB), CYS Investments Inc (NYSE:CYS) and NACCO Industries, Inc. (NYSE:NC), simply because they trade below book value. Any shares bought back at such discounted levels means they can create an even lower price/book ratio.

Let me explain.  Let’s say a company has $250 million in cash, book value of $1 billion and a market value of $900 million (or a 0.90 price/book value).  Now, let’s say the company spends $200 million on a buyback. Well, the book value falls to $800 million (as cash is reduced) and the market value falls to $700 million (as the share count falls and the share price stays constant). This stock would now trade for about 0.88 times book value (700/800).

The fact that Tellabs and Nacco are buying back shares after they have fallen more than 35% from the 52-week high is another plus. If you see a company buying back stock while it’s right near its 52-week high, then it is tacitly admitting that “we have too much cash right now and lack creative ways of deploying it elsewhere.”

I’d make an exception to this “below book” rule for Acacia Research Corporation (NASDAQ:ACTG), which has anasset base that is likely understated on the balance sheet. Acacia acquires — and then exploits — a range of technology patents, securing multi-year licensing agreements in areas such as wireless communications.

Acacia’s growing patent portfolio has fueled at least 30% top-line growth in 2009, 2010 and 2011. Thanks to a steady jump in patent acquisition activity during the past 18 months, coupled with an ongoing stream of new licensees, sales should rise more than 50% this year, to around $275 million. The high-margin nature of licensing revenue means earnings should more than double this year to above $1 a share, and above $1.25 a share in 2013.

10 Small-Cap Stocks With Aggressive Buyback Plans

Still, those growth forecasts are a bit lower than where they stood six months ago, as management concedes that some large licensing agreements are taking longer to negotiate. Even if some of those talks slip into 2013, and even if some talks end without bearing fruit, this is still shaping up to be a solid growth story. Consider that in the first nine months of 2012, Acacia has acquired 45 new patent portfolios for $214 million — and still has more than $400 million in net cash in the bank. If shares remain depressed after the current buyback is completed, you can look for a possible additional buyback program to take place.

Risks to Consider: Buybacks done at market highs can be a waste of shareholder’s money, so if the market tumbles a lot lower from here, then these current buyback programs will have proved to be poorly-timed.

Action to Take –> The silver lining of a falling market is that buyback plans can defend shares with buying (when sellers are otherwise dominating the trading tape) and can also sop up even more shares if the stock price falls. Each of these companies stands to cut the share count (and boost earnings per share) by at least 10%, and a falling stock price would just magnify that leverage. Use this list as a starting point to find a good buying opportunity. But don’t be simply looking at buyback announcements in a vacuum.  Take note of the relative valuations of the company in question — especially to see how close to book value it trades — and assess the financial strength of the company in question.  If the buyback will be done out of cash flowand not from cash balances, then the company’s financial strength could come into question in an economic downturn.

This article was originally written by David Sterman, and posted on StreetAuthority.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!