Discussion in 'Trading' started by ShoeshineBoy, Aug 21, 2001.

  1. If a stock is entering into a buyback program, is that generally good or bad if you want to go long? I found a stock that was rising quite well, but appears to have flattened and I'm wondering if it's just temporary cuzz that's when they started buying back??
  2. As always : it depends .... on various parameters. Among others, the size of the buyback program compared to the float.

    Normally, one would say, a buyback is good thing, since the company doesn't find any better investment for their cash than their own stock. Very confident about the companies future.

    Others may say, if a company has no better idea to invest cash wisely than buying back own stock, the management seems not to be very innovative - bad for the company.

    A buyback reduces the float of the stock and can ultimately result in more volatility ( less stock out there for those who are interested to buy, larger spreads and all other advantages / disadvantages of low float stocks )

    A buyback program can also prevent a company from an unfriendly takeover. A buyback would be a strategic action in this case.

    Often enough though, buybacks are announced when the shareprice has dropped significantly and investors are not anymore convinced about the companie's prospects.
    They buyback shall restore trust in the companie's future among investors.

    However, if the program covers only a small amount of the float, this won't help much unless the fundamentals of the company show signs of improvement along with the buyback.

    It pays out to do some research on the reasons for a buyback before jumping on a rolling train.

    regards &
  3. Htrader

    Htrader Guest

    Concerning buybacks, you really have to read the fine print carefully. Many times the buybacks will have vague terms that don't really specify how much the company must buy, simply how much they could buy. Also, buybacks can strech many months thus diluting its effect on the share price. I wouldn't buy a stock simply because its buying back its own stock, but I would take it into consideration along with other factors.
  4. Sometimes a company will announce a large buyback, but their bids are way below the market. I think it is more important to await news of the completion of the buyback. If in a few months you see a pr that says that they bought 15% of the common outstanding at a said price, that's usually a good sign. Otherwise, they may never buy a single share.
  5. Buy-back announcements are often used by companies to deflect from some other issue in their business/financials. The hope is that the investors and financial press focuses on the "positive" buy back news.

    Many times the buy back does not have a specific time frame and the company will often (with no public disclosure) simply stop the program at some point in the future.

    Often buy backs are used to insure against stock option exercies by employees, and hence will not effectively reduce the float.