In their paper "The Nature and Persistence of Buyback Anomalies (2007)", Peyer and Vermaelen used 4 criteria to evaluate the abnormal returns following the announcement of a share repurchase by a company. In short, Peyer and Vermaelen found that repurchasing companies that exhibit the following 4 charactaristics have significant abnormal returns of 46.6% 36 months after the repurchase announcement (Peyer, Vermaelen 25):
1) Value Stock- As defined as having a low price/book ratio
2) Small-Cap
3) Poor raw returns in the last 6 months, and by extension, analyst downgrades before repurchase
4) Motivation of repurchase is to enhance shareholder value
On April 2, Boingo announced a share repurchase of $10 million. From the criteria from Peyer and Vermaelen's paper, it is clear that Boingo is likely to be a strong performer in the future. I will evaluate each criteria:
Value Stock
As of this writing, Boingo has a Price/Book ratio of 1.4x, which is considered very low compared to the average S&P 500 Price/Book ratio of around 2.4x.
Small Cap
Boingo's market value is currently around $200m, which by all definitions is a small cap stock
Historical Returns
For the previous six months, Boingo's shares have fallen nearly 30%, in spite of the S&P 500 reaching record highs.
Motivation of Repurchase
Given our confidence in our long-term business prospects and our strong balance sheet and cash flow from operations, we believe repurchasing common shares is an appropriate use of the Company's capital resources. At the same time, we have appropriate resources to continue to execute on our strategic growth initiatives.
David Hagan- President of Boingo
Conclusion
Peyer and Vermaelen hypothesized that the reason these companies experience abnormal returns is because the management uses a share repurchase as a signal to indicate that they disagree with the market's assessment of the company. This would make more sense for companies that have recently experienced large drops in share prices, analyst downgrades, and are trading at low multiples. It seems clear that Boingo meets all of the criteria, and for this reason, investors should give Boingo a closer look.
Source:
Peyer, Urs C. and Vermaelen, Theo, The Nature and Persistence of Buyback Anomalies (April 2009). The Review of Financial Studies, Vol. 22, Issue 4, pp. 1693-1745, 2009.
Disclosure: I am long WIFI.