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Share Buybacks Signal Corporate Optimism

Although questions remain around inflation and the pace of interest rate hikes, strong earnings and share buybacks paint a bullish picture.

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If you are feeling down about your portfolio, cheer up. It is summer. Even some of the world’s leading investors were caught flat-footed during the recent selloff in global markets. These hedge funds and thematic ETFs built massive exposure to growth stocks and bid up their prices and are now unloading at the bottom.

Instead, I would preach patience – better days are ahead as corporate earnings have remained strong for best-in-class companies and forecasts for corporate share buybacks are projected to reach their highest level ever in 2022. These buybacks are a huge driver of stock demand as companies step in to purchase their own shares in the open market.

If corporations are still bullish, why aren’t you? $1 trillion in corporate share buybacks are forecast for this year.

Heck, even Warren Buffett’s Berkshire Hathaway posted a near $50B loss on its equity positions for the quarter despite their core business generating positive operating profits. It has been a rocky year.

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But abandoning investments is never a sound strategy – instead look to accumulate high-quality companies at a discount and continue to invest in American prosperity through low-cost S&P 500 ETFs.

It is a tale as old as time. Many so-called experts would tell you the U.S. is already in a mild recession. But recessions are among the best times to buy assets – wealthy investors step in when everyone is running for the exits. In fact, investors like Stanley Drunkenmiller almost exclusively look at the flow of money in the economy to dictate investment decisions, preferring to invest when the Fed is accommodative and asset prices are low.

That is exactly the environment we were in during 2020-2021, coming out of the covid pandemic.

So, when the tables turned, it was a brutal repricing event. But remember, the federal reserve must raise interest rates in order to inevitably use the only tool at their disposal when things turn south – the ability to cut the interest rate. Ironic.

If interest rates always remained low, that would be unhealthy for the economy.

2023 and Beyond

Investing is about the future, not today. This is a contrarian idea that can be difficult to grasp, but it’s the core tenet that corporations embrace when pursuing share buybacks.

Yes, prices are impacted today based on sentiment and fear. But selling Amazon (AMZN) stock in 2000 at loss because it seemed like the right decision is tough to stomach in hindsight.

Instead, it is better to follow the same strategy in both bull and bear markets.

Here are a few things to remember:

  • Invest for the long run in companies that you can understand how they make money; otherwise stick to the indexes
  • Create a selling strategy. Everyone talks about buying stocks, but when do you sell? Simplify your approach and take modest profits during periods when stock prices appreciate and treat it like a dividend to reinvest in the future – this helps form discipline when stocks are rising
  • Wade in and out of positions instead of purchasing all at once
  • Determine a loss you’re willing to accept and set limits, this removes emotion from the equation
  • Compare a stock with its closest competitors using tools made available by your broker. Ask yourself simple questions like, what are the company’s margins? Is the company growing or stagnant? Who are their customers?
  • Ask yourself, what is the catalyst for the company to gain value? Why is this company around today and why will it be needed in the future?
  • Consider selling covered calls on stocks you own and puts on stocks you would like to own
  • Avoid cyclical, consumer-facing businesses that only do well during periods of excitement
  • Avoid commoditized businesses that have exposure to specific input costs to generate widgets
  • Check LinkedIn and see if they are growing their headcount or if they’re quick to lay off employees (treating people right is a good indicator of long-term success)

You should only sell stock in companies if:

  • The long-term durability of the business fundamentally changes
  • A better investment opportunity arises

If you sell everything today and become too enamored with inflation headlines and one quarterly earnings report that missed by .2% you will regret, it. American companies are the best companies in the world to invest in, and share buybacks are how companies invest in themselves. Find a few winners or take the S&P 500, rain or shine, to compound wealth in any environment.

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Ian Beaudoin is the former Chief Analyst of Cabot SX Crypto Advisor.