mardi 7 août 2018

The kings of buyback

Many people seem to put a lot of emphasis on growth when buying stocks. I agree with them: growth is very important. But, to me, the management is more important than growth, because it usually assures more viability in the long run. That's why I've never bought ultra-growth companies like Amazon or Shopify. Charts can show I've been wrong because I could have doubled my portfolio over the last year if I had sold everything and just bought these two stocks. But I would have been much more anxious because they don't fit with my "well-managed stocks model".

When you begin, you don't have a clue on what makes a well-managed company. The answer is variable depending on the context. But, usually, if the debt level is low/medium, the executives buy back stock and the ROE is over 15 (ideally over 20), the chances that this company may be well managed are good. And a well-managed company may not surge overnight, but at least, it retains it's value, which is something you learn to appreciate over time.

Among these indicators of a well-managed stock, buybacks are usually great because they make you a bigger owner of the stock. For instance, if you own 10% of a company and the company buys back 50% of it's float, you're now the owner of 22,2% of the company. And you didn't do anything. Obviously, some times are better than others for a buyback. For instance, if the historical PE ratio of the shares has been around 15 and the company buys back it's stock at a PE of 25, you may be worried. But, for those who don't want to ask themselves too much questions, let's remember the fact that buybacks are usually good.

And here's some very great stocks in a buyback perspective. You can see the percentage of the float they bought back over the last 3 years:

Discover financial: 21%
O'Reilly Automotive: 19%
Apple: 15%
Dollarama: 14%
Carmax: 13%
Disney: 12%
Canadian Pacific: 11%
Credit Acceptance Corp: 10%
Home Depot: 10%

Buying back 10% of a multi-billion dollars company over a 3 years period is incredible. You have to be very disciplined and, mostly, dispose of a lot of money. So, there's two clues there: First, these companies make a lot of money, second, their managers want to offer you a bonified performance. 
...Then, you understand why Disney sell their fucking Magic Kingdom tickets for 115$ US. They want to screw costumers at the benefit of shareholders. 

So, I'm probably wrong VS the rest of the market, but I'll always be more amazed by a company that buys 10% of it's shares over a short period of time than about a company that grows it's sales by 20% over the same period. In a way, growth may be just an effect of fashion while buybacks are a great effort. 

6 commentaires:

  1. Earnings Per Share Growth quarter over quarter year after year is the most important metric for me. All stocks are bad investments unless they go up in value...of course.

  2. I agree with Speculator. Of course, if you're buying back shares, you're increasing the earnings per share of the remaining shares. But the truly great companies do not focus on dividends or buybacks. The very best stocks have managements that can just keep buying other companies and growing earnings while maintaining a very high return on equity. The best example I can think of is Constellation Software. Couche tard was another great one (back when they had considerably less than 30,000 convenience stores). What would Couche Tard do? Buy a business for something like six times annual earnings? It's great to find such great companies with outstanding management when they still have a lot of room to grow.

  3. I also bought CSU on the recent drop in price. It then jumped $27 today. tankyouvedemuch

    1. Good move. But I am feeling a bit bitter since the management decided to cancel the recent earning call knowing that they will annonced a significant miss. The management have an excellent track records but not wanting to face the public on a bad news is not good

  4. Dollarama has bought back shares while destroying their balance sheet.

  5. Look at Great Canadian Gaming. Great company, low debt, lots of buybacks and growth projects out to 2022. I like how they have partnered with Brookfield with the Ajax Casino. Old people gamble. Stock has pulled back and is an opportunity.