U.S. Companies’ Contrary Indicator for Stocks: General Electric Company (GE), 3M Co (MMM)

After setting a new all-time nominal high on the Dow, stocks added to their gains today as the S&P 500 and the price-weighted Dow Jones Industrial Average advanced 0.1% and 0.3%, respectively.

Despite a new high on the Dow, the VIX Index, Wall Street’s fear gauge, was slightly higher on the day, closing at 13.53. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.)

Buy ‘em
Research firm Birinyi Associates published a note this morning, with some data that is consistent with the buoyant mood of a stock market that is close to setting new all-time nominal highs (I say “close to” because I’m waiting for the S&P 500 to confirm the Dow’s milestone):

We recorded $117.8 billion in buyback authorizations during the month of February, representing a 103% gain over the same period in 2012 ($118 bln vs. $68 bln). February was the largest month, in dollar terms, on record.

We know individual investors are still not much for equities right now, but companies, apparently, are. However, while stock buybacks may continue to contribute momentum to this bull market, it’s not a reassuring indicator as far as value and long-term returns are concerned, as Birinyi’s next observation suggests:

We are currently on a run-rate to log $827 bln of authorizations in 2013 vs $477 bln in 2012. 2007 was the only year in our database where we recorded more ($863 bln).

Unfortunately, due to a combination of bad incentives and ignorance, treasurers, company finance executives, and executive boards do a spectacularly bad job when it comes to implementing share repurchases. The following graph, which spans the fourth quarter of 2002 through the third quarter of 2010, illustrates the problem. The blue bars represent the quarterly share buybacks of S&P 500 companies (in billions of dollars, left axis) and the black line represents the quarterly average value of the S&P 500 index (right axis):

To summarize: As long as share prices are going up, companies are happy to buy them in increasing amounts; when shares get cheaper, they prefer to buy them in smaller sums. That makes no sense from the perspective of a value investor. Which are some of the names to scrutinize right now? According to Birinyi Associates, of the top five largest repurchase authorizations through the end of February, three are members of the Dow: The Home Depot, Inc. (NYSE:HD)General Electric Company (NYSE:GE) and 3M Co (NYSE:MMM). That doesn’t mean the shares are necessarily overvalued, but it certainly invites scrutiny.

The article U.S. Companies’ Contrary Indicator for Stocks originally appeared on Fool.com and is written by Alex Dumortier, CFA.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends 3M and Home Depot, and owns shares of General Electric.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!