thehobe

Why You Should Short Companies Doing Share Buybacks

I disagree with your basic premise: you do not like a company that buys back stock because it cannot find other business opportunities to expand. A company (such as Linear Technology) could never find another company as profitable as itself, so it bought back stock with hoards of non-perforning (<5% return) cash. I think this was the perfect reason to buy back stock. This purchase, of course, did reduce dillution due to stock options of course but this was going to happen anyway. If they had purchased another company at a profit margin lower than their existing business, the "numbers" would certainly degrade instantaneously. The stock buyback was the way to improve the "numbers" instantly without having to improve a non-performing business up to their level of performance. Bigger is not always better. In the case of Linear Technology, the stock over the last 6-12 months went back down but so did the entire industry. They still maintain fantastic "numbers".