How to Beat the Stock Market by 200%

by JT McGee

Over the weekend an excellent article hit Seeking Alpha promising an easy way to beat the S&P 500 index two times over. Naturally, it caught my attention.

It’s an excellent piece. You should read it, but I’ll summarize it here. (Seeking Alpha writers are compensated based on page views; be nice and click through!)

The market-beating strategy

Dying to know how to beat the S&P 500 index?

Here’s how:

• Grab a list of the S&P 500 constituents
• Invest equally in the 100 stocks that repurchase the greatest percentage of their shares each year.
• Rinse and repeat.

Sounds pretty easy, huh? It is.

A Bloomberg terminal allows you to easily view the performance of this particular strategy by graphing the S&P 500 Buyback index. Here’s how the top 100 “cannibals” compared to the S&P 500 index on a total return basis:

Pretty incredible, huh?

Take another glance and look at the relative performance after the tech bust. Buybacks paid off – the S&P 500 dropped; the repurchasers held their own. From peak to trough in the financial crisis, companies that were in the market for their own shares were less volatile than those that weren’t.

I love buybacks

This might be my tenth article on share repurchases, but it’s not just because I like talking about the same stuff over and over again. It’s because companies that repurchase their shares consistently outperform those that do not.

It’s capital allocation, plain and simple. A company that repurchases shares is investing money to generate returns. Since stocks tend to outperform virtually all other asset classes, companies should be buying their stock, not letting cash sit in T-bills earning .01%.

If I own a company’s shares, I never, ever worry about their repurchases. The more the merrier – buy like crazy. I own it because I believe it’s cheap, so why wouldn’t I want cash to flow to buying more cheap stock?

For all the arguments against buybacks (management is bad at timing, they just cover option issuance, etc.) the cold hard facts just don’t line up. Companies that repurchase their shares outperform all the rest. No surprise – the biggest repurchases come from what I like to call “value stocks.”

{ 1 comment… read it below or add one }

Sfi July 25, 2013 at 21:46

Why of course the math works. Most investors want a company to increase earnings say 15% per year. Value investors can get these returns with much less actual earnings growth.

For example i bought LO last year when it was yielding over 5%. If everything stays the same my earnings will increase 5% if i buy more shares. Then the company announced multiple buybacks that are probably worth about 6% of outstanding shares (for just 2013). Combined this implies a return of 11%.

The company will also increase its revenues and earnings by about 6% or more. This adds another potential 6% to the return. This increase is spread across fewer total shares and a larger number of shares that i own thru reinvestnent.

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