I’m simply going to say it…
You may make some huge cash within the inventory market doing the reverse of what corporations are doing with their very own inventory.
Which means company share repurchases generally is a large contrarian indicator.
When corporations are shopping for again inventory aggressively, it’s probably time to promote. And when corporations cease repurchasing shares, it’s probably time to purchase.
On the finish of final yr, I ranted about how corporations had been shopping for again all-time report quantities of inventory whereas insiders offered an all-time report quantity of shares.
Then look what occurred…
In 2022, the inventory market had its worst first half of a yr in 50 years!
I’m not saying that each firm does share repurchases fallacious.
Just a few of them, like Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A), do it extremely properly.
That stated, company buyback charges by sector are ill-timed a excessive share of the time.
Working example… American banks.
Based on second quarter earnings for U.S. banks, many are shutting down their fee of share repurchases.
In the course of the second quarter of 2022, the six largest U.S. banks repurchased a complete of $5.1 billion value of inventory.
That’s simply 29% of the $17.5 billion value of inventory that the identical six banks repurchased within the first quarter of this yr.
That’s an enormous discount in buybacks.
And guess what?
The share costs of shares within the banking sector have dropped steadily all year long.
Which means these corporations had been shopping for aggressively when share costs had been excessive.
And now that share costs have declined and supply higher valuations, the banks are shopping for a lot, a lot much less.
The precise reverse of what you’re presupposed to do.
For the rest of the yr, U.S. banks might be shopping for even much less.
Each JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) indicated that they’re placing share repurchases on maintain in order that they will construct capital.
In different phrases, they’re shopping for excessive as a substitute of low.
Sadly, that’s how publicly traded corporations typically do it.
Buybacks ought to be the sensible cash available in the market. As a substitute, they’re the alternative.
We have now profited by exploiting this contrarian buyback indicator within the banking sector prior to now.
In 2020, I pounded the desk on shopping for banks and Wells Fargo (NYSE: WFC).
Guess how a lot inventory banks had been shopping for again in 2020?
None!
The chart beneath paints an unbelievable image.
It plots the share worth of Wells Fargo in opposition to the quantity of inventory the corporate has purchased again quarterly.
The 2 traces match up precisely!
When the inventory worth goes down, the buybacks cease.
Then, when the inventory worth goes up, the buybacks ramp up.
You possibly can’t make these things up!
The truth is that when the economic system is nice and share costs are excessive, the massive banks – and most of company America – purchase again inventory aggressively.
But when share costs are excessive, they ought to be placing money within the financial institution and ready for the subsequent downturn in order that they will repurchase inventory at nice valuations.
However that isn’t what they do, and that could be a pity.
The excellent news for us is that we are able to use their foolishness as a purchase and promote indicator.
Financial institution inventory costs have moved down. Which means financial institution valuations in opposition to e book worth and earnings have additionally moved down.
No shock, then, that our share repurchase indicator is telling us that it’s time to purchase financial institution shares.
As I’ve written beforehand in The Worth Meter, Citigroup, which trades at a minuscule 50% of e book worth, is the perfect worth that I see within the sector at the moment.
And the remainder of the sector is getting enticing once more too.
Good investing,
Jody