By John Del Vecchio and Brad Lamensdorf
As the pandemic wanes and daily life quickly gets back to normal, corporations have been busy buying back their own stock.
Just like the good old times.
Not just normal buybacks. Record buybacks.
This should be expected. Last year, buybacks and dividends were often suspended and now the runway is clear to resume stock buying.
As the chart below shows, corporations are wasting no time in taking stock out of circulation.
The figure is almost a $500 billion through April, 2021.
Daily activity is about three times what would normally be considered aggressive buying. This is bullish for stocks in the short-term but does come with a caveat.
Many companies will buy back stock and then assume debt, thus recapitalizing their business. Debt is cheap. Debt may be much cheaper than paying dividends. Finally, all else being normal, debt allows for higher returns on invested capital.
This will work well until it doesn’t. When the next bump in the road comes along, poorly managed companies or those with competitive disadvantages may find themselves vulnerable to a massive butt-kicking.
This is another reason why stock picking, as opposed to blindly buying indexes, may come back into vogue. Stock pickers could very well shine over the next cycle as better returns may be had by differentiating among the best positioned companies.
To learn more about how these indicators can help manage risk in your portfolio, book a call with Brad.
DISCLOSURE: LAMENSDORF MARKET TIMING REPORT
Lamensdorf Market Timing Report is a publication intended to give analytical research to the investment community. Lamensdorf Market Timing Report is not rendering investment advice based on investment portfolios and is not registered as an investment advisor in any jurisdiction. Information included in this report is derived from many sources believed to be reliable but no representation is made that it is accurate or complete, or that errors, if discovered, will be corrected. The authors of this report have not audited the financial statements of the companies discussed and do not represent that they are serving as independent public accountants with respect to them. They have not audited the statements and therefore do not express an opinion on them. The authors have also not conducted a thorough review of the financial statements as defined by standards established by the AICPA.
This report is not intended, and shall not constitute, and nothing herein should be construed as, an offer to sell or a solicitation of an offer to buy any securities referred to in this report, or a “buy” or “sell” recommendation. Rather, this research is intended to identify issues portfolio managers should be aware of for them to assess their own opinion of positive or negative potential. The LMTR newsletter is NOT affiliated with any ETF’s. Active Alts is affiliated with Lamensdorf Market Timing Report. While LMTR uses charts from SentimenTrader, they do not have a financial arrangement with SentimenTrader Past performance is not indicative of future results.