Roughly one month ago, online travel provider Priceline.com (Nasdaq: PCLN) made a nice gesture toward shareholders, announcing plans to buy back $200 million worth of company stock. Investors should hope that the company doesn't follow through on this plan, because have shot up roughly $120 since the March 7 announcement to a lofty $763.
This means Priceline will buy back fewer shares than the month-ago announcement would imply. Priceline would be better off canceling that buyback plan, perhaps waiting for a major pullback before putting a buyback plan into motion.
Sadly, Priceline.com has plenty of company.
I went back and looked at every stock buyback announcement since October 2011, and in most instances, the current share price is solidly higher than when the buyback plan was first announced. As I've noted in the past, buying back stock while it trades at multi-year highs has proven to be a big waste of shareholder money.
Instead, it's wiser to look at stocks that have fallen since the buyback was announced. The lower share price is clearly good news, because the share count can be reduced that much more quickly with a fixed amount of funds.
To be sure, buybacks create a solid backstop for nervous investors. State Street (NYSE: STT), Keycorp. (NYSE: KEY), Comerica (NYSE: CMA) Dycom (NYSE: DY) and Safeway (NYSE: SWY) have all announced buybacks in the past 30 days, and if the market swoons in coming weeks, then these buyback plans should provide buying support as the companies buy back stock that investors are selling. Thanks to the recent market pullback, all of these stocks are only modestly lower than when the share buyback was announced.
If you go further back, then you can find several stocks trading well below levels when a buyback was initially announced. Here are some interesting ones to consider...
1. Potash Corp. of Saskatchewan (NYSE: POT)
This fertilizer producer had to regroup in late 2010 after the Canadian government blocked a takeover by mining giant BHP Billiton (NYSE: BHP). Potash was fine with that decision anyway, noting that BHP's offer of $130 a share (or $43 a share) was "grossly inadequate."
Shares of Potash moved past $60 in early 2011 as investors came to agree that the stock was quite undervalued. In support of the stock, Potash began buying back $2 billion worth of stock. That buyback is now going a lot further now that Potash's shares are below $45.
Part of the share-price weakness steams from a fairly weak fourth-quarter. A drop in fertilizer demand led the company to trail profit forecasts by roughly 10%. Analysts quickly slashed their profit forecasts for the first and second quarters of 2012 as well, but the current $0.65 earnings per share (EPS) consensus now looks too low.
That's because farmers have set very aggressive planting targets this spring and appear to be restocking their fertilizer supplies a fast clip. Goldman Sachs expects "...a strong U.S. spring application season will be a positive driver for shares as robust farmer demand coupled with production cuts help draw down the current inventory overhang."
With shares trading near BHP's lowball offer, Potash appears to offer solid downside support. That massive stock buyback could bolster per share profits by shrinking the share count.
2. Cypress Semiconductor (NYSE: CY)
Roughly a year ago, I noted that Cypress Semiconductor was seeing decent business momentum, as its shares were under-girded by a stock buyback.
But about a month ago, Cypress warned business had slowed a bit, slashing first-quarter sales guidance from about $205 million to roughly $185 million. That pushed shares down to a recent $14.30, well below the upper-teens level where the company's share buyback was announced in early 2011. Yet even as Cypress warned of a first-quarter shortfall, management noted that business appeared to be bottoming out and predicted that subsequent quarters would look more robust.
In the fourth quarter of 2011, Cypress bought back roughly 10 million shares. The company still has $319 million left on the current share buyback plan, which would sop up more than 20 million additional shares. The recent swoon likely means Cypress has been an active buyer of its own stock in recent weeks. Nearly 10% of shares outstanding have been bought back during the past 15 months, and by the time the current plan is done, that figure could approach 30%, which will have a commensurately positive effect when business bounces back.
[block:block=16]Analysts at Dougherty & Co. say the worst is over and expect a "[second-half] ramp and continued momentum into 2013 off new products." They have a $20 price target in place, though investors may wish against that in the near-term so Cypress can buy back more shares while they trade near lows.
Risks to Consider: Stock buyback plans don't stop shares from falling, but they likely slow the decline a bit.
Action to Take --> These are the kinds of stocks you want to own if the market gets hit by a wave of profit-taking this earnings season. Companies that have recently announced buyback plans may move back into favor if and when this happens. Many of these companies will provide progress reports on their current share buyback efforts, so it pays to see how much the share count is falling in each case.
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