With the market's continued weakness, I thought I'd look for stocks with magic formula characteristics that are buying back shares. The share buybacks speak to management's confidence in the futures business and allow them to take advantage of weakness in the stock market to make accretive stock buybacks, while the magic formula characteristics show companies trading for below average multiples with above average returns on capital.
To start, I took the S&P 500 and eliminated any company that hadn't reduced shares outstanding over the past 12 months. Then I ranked the remaining stocks from cheapest to most expensive on an EV / EBIT basis (so Humana (NYSE:HUM) was the cheapest and received a one, Apollo (NASDAQ:APOL) the second-cheapest and thus received a two) and from best to worst ROIC (best ROIC received a one, second best a two, etc.). Finally, I added the scores for each stock up and ranked the stocks based on the best score.
The following are the 20 highest-rated stocks:
|Ticker||Company||Price||EV / EBIT||EV / EBIT Rank||ROIC||ROIC rank||Total Rank||% Share Reduction|
MSFT ||MICROSOFT CORP||24.73||6.26||18||50.54%||14||32||3.76%|
LMT ||LOCKHEED MARTIN||80.34||7.22||30||98.02%||4||34||6.39%|
LO ||LORILLARD INC||111.67||8.74||52||254.42%||2||54||6.08%|
INTC ||INTEL CORP||23.64||6.99||25||33.23%||34||59||4.24%|
DELL ||DELL INC||16.00||6.43||19||30.68%||42||61||2.57%|
TXN ||TEXAS INSTRUMENT||34.91||8.46||48||51.38%||13||61||5.00%|
BIG ||BIG LOTS INC||38.02||7.49||36||35.65%||30||66||8.22%|
|TJX||TJX COS INC||54.31||9.49||64||54.20%||10||74||4.49%|
ROST ||ROSS STORES INC||81.76||9.78||68||58.82%||8||76||4.34%|
BBY ||BEST BUY CO INC||32.13||5.89||12||25.73%||66||78||6.99%|
RSH ||RADIOSHACK CORP||16.12||4.72||6||24.19%||76||82||15.41%|
BMY ||BRISTOL-MYER SQB||28.79||7.72||39||29.58%||47||86||0.53%|
HRS ||HARRIS CORP||48.05||7.32||34||28.61%||53||87||0.86%|
BBBY ||BED BATH &BEYOND||54.95||9.27||57||34.35%||33||90||4.88%|
The list looks interesting, as the average stock on it sports an EV / EBIT of just 7.1x despite sporting an ROIC over 50% and reducing shares outstanding by almost 6% over the past 12 months.
Microsoft is the first name on the list that jumps out at me, trading under 10x earnings despite a fortress balance sheet and near monopoly in many of its business lines. Critics will point out the rich valuation it paid for Skype and say its best days are behind it, but the $8.5B it paid for Skype, while likely will lead to a writedown, is a pittance compared to its $50B+ in cash. Critics will also point to its inability to gain a foothold in the tablet / smart phone market, but at 6.25x EV / EBIT, investors aren't paying much for the hope for a turnaround.
RadioShack, Best Buy, and Gap lead a slew of retailers popping up on the list. Many retailers are selling off on concerns of a weak consumer, strong internet competition, and commodity prices depressing margins. However, they all sport incredibly consistent earnings and cash flows, and the buybacks at today's prices should prove incredibly accretive as the economy and consumer continue to gain strength. As an added bonus, their strong cash flows are attracting plenty of interest from private equity, and potential LBOs could serve as a catalyst to unlocking value.
Disclosure: I am long RSH.