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On Tuesday, Oct. 10, Wal-Mart Stores Inc. (NYSE: WMT) announced a plan to buy $20 billion worth of its own stock back from the market.
I was excited, but the reaction was mixed.
You see, there’s a short list of reasons academics and analysts don’t necessarily love buybacks…
Companies buying back potentially overvalued stock instead of paying down debt… The way buybacks mask iffy earnings per share (EPS)… The fact that there doesn’t seem to be a long-term benefit… The cash spent on buybacks could be spent on growth…
Those are all valid reasons, but they’re arguable. Besides, it doesn’t really matter for our purposes.
You see, in the here and now, investors and traders (including this one) generally love buybacks, because they drive market value and share prices, boost EPS, and hike dividend payments.
And when you’re a rules-based trader, making fast cash by moving in and out of a profitable position in a week or a month, the long-term sustainability of the executive board’s decisions matters a whole heck of a lot less.
And that’s why this year’s real lack of buyback action – down nearly 10% from the first quarter and 5.8% year on year – could mean trouble ahead, especially here in the thick of earnings season.
So, here’s what I’m looking out for…
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.