Buyback Mania: 3 Stocks to Trade
Buybacks – when a company repurchases its own shares – have dominated the corporate landscape in 2018. DataTrek estimates that, in the past 12 months, S&P 500 companies have spent $646 billion purchasing their own stock, a 29% increase over the previous year. A recent Securities and Exchange Commission (SEC) filing disclosed by Warren Buffet’s company Berkshire Hathaway Inc. (BRK.B) shows that it bought nearly $1 billion of its own stock in August.
Investors view buyback programs favorably, as they improve shareholder value by reducing the number of traded shares and demonstrate that a company has excess cash on hand. Companies, on the other hand, may buy back their shares if they believe they’re undervalued or to increase earnings per share (EPS), both of which help the stock price rise and attract greater investor interest. Share repurchase plans may also be conducted to gain greater ownership or used as a dividend alternative to return excess cash to shareholders.
Many analysts believe company buybacks have underpinned the market’s strong performance in 2018. “Corporate repurchases remain the largest source of demand for shares,” wrote David Kostin, chief U.S. equity strategist at The Goldman Sachs Group, Inc. (GS), per CNBC. Traders who follow stocks that have recently announced sizable share repurchase programs should monitor these three S&P 500 companies for trading opportunities.
MetLife, Inc. (MET)
Founded in 1863, MetLife, with a market capitalization of $44.57 billion and paying a 3.77% dividend yield, provides a variety of insurance and financial services products. The company is the largest life insurer by assets. As of Nov. 8, 2018, MetLife stock has a year-to-date (YTD) return of -8.48% but has returned 10.56% over the past week after the company announced a $2 billion open market buyback that represents 4.6% of its shares on issue.
MetLife shares traded within a six-point trading range from late January through September before staging a dramatic sell-off during October. The stock has since rallied sharply to pare most of October’s losses since the company announced its buyback on Nov. 1. Traders should look for an entry on a pullback to $42.5, where the price is likely to find support from the previous trading range’s lower trendline and the 20-day simple moving average (SMA). Consider place a stop-loss order just beneath the October swing low and booking profits at the $49 level – a resistance area from the Jan. 30 earnings gap.
United States Steel Corporation (X)
Headquartered in Pittsburgh, Pennsylvania, United States Steel produces and markets flat-rolled and tubular steel products in the United States and Slovakia with a steel-making capacity of 22 million tonnes. The company announced a $300 million buyback program, which represents 6.7% of its float, on Nov. 1. Trading at $29.35, with a market cap of $5.2 billion and offering a dividend yield of 0.69%, the stock has returned -16.99% YTD. However, over the past week, it has returned an impressive 14.77%.
The United States Steel share price traded within a well-defined descending channel between March and late October. It then bounced off the channel’s lower trendline in early November, which coincided with the buyback news. Those wanting to trade the stock should seek an entry point near the $27.5 level – an area on the chart supported by the 20-day SMA. A take-profit order could sit at the $33 level, where the stock’s price may find resistance from the channel pattern’s upper trendline line that connects the March and July swing highs. Think about placing a stop below the Oct. 30 low doji candlestick to protect trading capital.
Akamai Technologies, Inc. (AKAM)
Akamai Technologies, headquartered in Cambridge, Massachusetts, provides a range of cloud solutions that allow customers to deliver content efficiently and securely through the strategic location of servers. It has over 200,000 servers distributed across 130 countries. The company, with a market cap of $11.73 billion, announced on Oct. 29 that it plans to buy back 10.5% of its shares, equaling $1.1 billion.
Akamai stock has traded in an orderly descending channel over the past four months. The share price gapped up into the channel pattern’s upper trendline on Oct. 30 after topping third quarter earnings and revenue expectations. Traders who are looking for a long opportunity should wait for retracements to the $66 level, where Akamai’s price should find support from the 20-day SMA and horizontal line price action. Stops could sit under the October swing low, while the June swing high at the $82 level is a suitable take-profit area.
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