Markets

When the Buybacks Stop, the Market Drops…

By John Del Vecchio  |  September 27, 2019

One indicator shows the market is teetering on edge.

It’s been the most important driver of stock returns this bull market.

It’s not earnings growth, not revenue growth, not margin expansion.

It’s stock buybacks.

Buybacks are the major driver of stock market returns over the last 10 years; the recent trends are troubling.

This quarter, buybacks have totaled about $176 billion — $40 billion of that is from one company: Microsoft (Nasdaq: MSFT).

This compares to $339 billion and $389 billion in the first and second quarter, respectively.

That’s a massive slowdown. But it’s not the whole story.

Here’s Where the News Gets Disturbing…

In the first quarter, stock buybacks accounted for about 50% of earnings growth in the S&P 500.

By the second quarter, stock buybacks accounted for all of the earnings growth.

The emperor has no clothes.

While buybacks have slowed, insider sales have skyrocketed.

What do insiders know? A lot.

No one has a better handle on the pulse of a company than insiders who own a boatload of stock. Much of management’s wealth is tied to stock price performance. The fact that insiders are dumping stock with reckless abandon is a warning sign, one we should all heed.

The Breakneck Pace of Insider Selling

If buybacks can no longer support the market, it won’t matter what the economy is doing.

China tariffs won’t matter.

The sitting president, whoever that will is, won’t matter.

Neither will interest rates or unemployment levels.

None of it will matter. It’s that simple.

In fact, low interest rates have allowed companies to borrow money cheaply to buy back stocks. Nowhere is this more evident than in “safe,” stodgy consumer companies.

As a sector, these companies have added more leverage than any other. Those “safe” companies used that debt to buy back stock. When the music stops, shareholders in those companies will be caught holding the bag. Low growth, crappy cash flows, and unsustainable earnings will be exposed.

This is precisely why with Hidden Profits, I focus on shareholder yield.

The Search for Answers… and Profit

Which companies have the ability to buy back stock and pay dividends from sustainable cash flow?

Which companies are buying back stock, not to boost earnings per share, but because the shares are undervalued?

Which companies can weather an economic storm and use the cash flow to take care of shareholders above all else?

Those are the questions I look to answer in Hidden Profits.

The stock market is fraught with risk. When the buyback game ends, the bottom very well could fall out of the market.

That doesn’t mean there isn’t opportunity in high-quality, high-yield stocks. If you subscribe to Hidden Profits, you know what I’m talking about.

If you don’t, it’s easy to check it out. There’s no obligation.

I’m already at work on my next couple of recommendations to be released shortly. So, stay tuned, and click here to learn more.

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John Del Vecchio

John Del Vecchio is the author of the bestselling book, Rule of 72: Compound Your Money and Uncover Hidden Stock Profits and What’s Behind The Numbers: A Guide To Exposing Financial Chicanery And Avoiding Huge Losses In Your Portfolio.

As the in-house stock market guru and forensic accountant for Dent Research, John stood on the shoulders of the great David Tice, James O’Shaughnessy and Dr. Howard Schilit, and built a framework of algorithms and a multi-factor grading system that has made him one of the more successful short-sellers around.

John is also the executive editor of our Hidden Profits newsletter and our trading service Small Cap All-Stars.

He graduated Summa Cum Laude from Bryant College with a B.S. in Finance and was awarded Beta Gamma Sigma honors. He earned the right to use the Chartered Financial Analyst designation in September 2001.MORE FROM AUTHOR