Companies this year started with enough money, thanks to a large tax cut, and they have put that money to work in the market.
In particular, they have been buying their own stock.
Even Buffett's Warkes Berkshire Hathaway joined the crowd, announcing recently that he has earned almost $ 1 billion of his own shares in recent months.
By November, US companies bought a $ 957 billion record of their own stock and were in a hurry to top the USD1 trillion USD for the year, according to TrimTabs Investment Research in San Francisco, although that the activity tends to slow down the last weeks of December.
Stock purchases could be a bullish signal. Companies that collect their own share bundles seem to indicate that they are underestimated and their businesses are doing good enough for future growth projects.
Part of the tax reorganization at the end of 2017 was an incentive for US companies to bring money to a home abroad abroad, and that's a bigger reason for the boom in purchases this year. There is a simple and relatively fast way of giving the new cash returned to work.
Apple said, for example, earlier this year that he would buy a gas of $ 100 billion of shares, the more in history. Cisco announced plans to buy US $ 25 billion, while Wells Fargo has revealed a $ 22.6 billion program.
For Berkshire Hathaway, the move to buy $ 925 million of open market shares was exciting by investors, and its share B pushed up 5 percent after the news came to an end.
Apart from stock purchases, companies can use extra money sitting on their balance to pay off debts, as AT & T has promised to do over the next year or even if it still pays its dividend. Or they can use it to invest in their businesses, as Amazon does by raising salaries and opening two new headquarters in Virginia and New York. They can also pay shareholders directly in the form of a dividend.
Acquisitions are another way of using cash, and almost three dozen megadeals have been announced more than US $ 10 billion in the United States through the first half of the year, according to Dealogic, a financial analysis company based on U.K.
However, purchases have an additional benefit of reducing the proportion of a general share, which can increase earnings per share (EPS). Some have argued that this is an imagination for companies trying to sneak their numbers or boost EPS to benefit operators at bonus time. And they do not really boost the economy, which is the idea behind the tax cuts.
The darkest side is considering: Companies use their extra money to buy their stock back because they do not see more useful ideas about the money. When companies do not have more profitable ideas, they tend to return the money to their owners, shareholders.
Berkshire changed its rules on purchases earlier this year, giving more room for Mr. Buffett and former head of Charles Munger had a long time to decide if it was time to dump in and buy. Certainly, Berkshire has striven to find another use of his cash. It came out of some procurement ideas last year, in one case after the application war ended, and it has not found many companies to buy that are not valued and rich.
Mr Buffett has pushed the idea of buying an asset for a long time when trading under his "indigenous value", which is an estimated cash output of the discounted business to this day. And Berkshire's inherent value has grown more than a book value in recent years.
Some investors took some comfort at Berkshire when buying back on their shares, he was prepared to remain disciplined about acquisitions and not just over-spending on contracts because money burns a hole in his pocket.
Perhaps that is the same signal that other companies give.
In Validea, we have set up a set of investment models that track the strategies used by some of the largest investors, including Mr. Buffett. Here are three companies that score high among companies that have announced purchases in the last year.
Biogen Inc. (TheBIIB-Q) – This biopharmaceutical company is scoring high on the models that trace the styles of Warren Buffett and Peter Lynch, former Fidelity portfolio manager. It has an average return on equity over 10 years of 22.7 per cent. Earlier this year he announced a purchase of US $ 3.5 billion. At the current market valuation, around 4.5 per cent of the company.
Alliance Data Systems Corp. (TheADS-N) – This stock also scores loudly on the models that track Mr Buffett and Mr. Lynch. The marketing data and provider of the loyalty program have consistency of long-term earnings and high earnings on capital and fairness. He also has a $ 500 million buyer plan, which equates to around 4.6 per cent of a market gap at current prices.
Diamond Hill Investment Group (DHIL-Q) – This small cap stock scoring well on the Buffett and Lynch models. The investor and fund administrator, who announced a $ 50 million purchase in September, has an annual earnings growth rate of 13.5 per cent and unpaid cash flow.
John Reese is chief executive Validea.com and Validea Capital, an executive managed ETF manager. Globe Investor has a distribution agreement with Validea.ca, a Canadian premium stock screen service.