Stock Buy-Back Activity Resumes

Includes: DIA, QQQ, RINF, SPY
by: Louis Navellier

We saw another wild week, with a net rise of +2.84% in the S&P 500 and a lot of short covering along the way. Many energy stocks may have bottomed out after the recent short covering. Energy stocks were helped by the fact that crude oil prices rose after Iran, Russia, Saudi Arabia, and Venezuela indicated that they would support proposed production caps. These talks about freezing production are apparently still ongoing. Iran supports other countries capping production, but they may not freeze their own production.

Crude oil prices may settle down in the upcoming weeks as the supply glut continues. The Energy Information Administration announced last week that U.S. crude oil supplies rose by 2.1 million barrels to an all-time high of 504.1 million barrels. This is the first time U.S. crude oil inventory exceeded 500 million barrels, according to the EIA. In the meantime, major oil producers keep trying to talk prices up.

The Federal Open Market Committee (FOMC) minutes were released on Wednesday, revealing that many Fed members were very worried about recent global financial conditions and recent market gyrations. Specifically, the FOMC minutes said that “waiting for additional information regarding the underlying strength of economic activity and prospects for inflation before taking the next step to reduce policy accommodation would be prudent.” Additionally, some of the more outspoken doves on the FOMC said that they want to see “direct evidence” of rising inflation before raising key interest rates.

In addition, St. Louis Fed President James Bullard, who had earlier called for a March interest rate hike did an “about face.” In a Wednesday speech, Bullard said that “two important pillars of the 2015 case for U.S. monetary policy normalization have changed” and added that “the risk of asset price bubbles over the medium term appears to have diminished.” After the recent market swoon, you can say that again!

Last week, I spent a few days with some brokers on a rainy Oregon golf course. I must say I was impressed about how they dressed up in their Gorton Fisherman Outfits with special gloves and played in 60-knot gusts with stinging rain and hail. Men in the Pacific Northwest are a lot tougher than I thought.

I sat out one day of golf to tend to the markets, but that night I got them to reveal what their near-death golf experience was all about. Interestingly, they all said that golfing was better than going to work in these wild markets. The brokers told me they had nothing to buy, and the wholesalers told me they had nothing to sell, so golfing in the Arctic-like tundra felt more comfortable than watching these markets.

I told the brokers that since the S&P 500 dividend yield was 50+ points above the 10-year Treasury yield recently, it was bargain-hunting time, but it was also time to be selective. I told them what I tell investors in my workshops. The keys to making smooth, powerful returns in this challenging market environment are (1) strong sales growth, (2) expanding operating margins, (3) a high return on equity, (4) strong cash flow, (5) rising dividends, and (6) a stock buy-back program. These are the fundamental factors I monitor.

This week, I want to look at key #6 – stock buy-backs. Last Tuesday, Apple (NASDAQ:AAPL) announced that it would issue up to $12 billion in new corporate bond debt to buy back their outstanding shares and pay dividends. IBM and Comcast (NASDAQ:CMCSA), two companies with very generous dividend yields, also announced that they would issue new corporate bonds. Corporate America is stepping up to issue more debt to buy back more shares.

As it turns out, the Fed’s single rate increase last December may be the only rate increase they announce for a long time; so the stock buy-back frenzy may continue for a while, fueled by low interest rates on high-quality corporate bonds. These buy-backs should help shore up the overall stock market.

Speaking of stock picking, a Bespoke report published last Wednesday illustrates clearly that the higher a company’s credit rating, the better its performance over the last year and the first six weeks of 2016. (That trend sharply reversed in the last week, as the following table shows.) Naturally, the higher a company’s credit rating, the cheaper it can borrow in the bond market to buy back its outstanding stock.

Stock Performance by Credit Rating Table

This table shows that the companies with higher-rated (by S&P) debt have performed better than lower-graded companies over the last year and in the first six weeks of 2016, but then the worst-rated companies outperformed the best-rated companies in the three-day 5.2% S&P 500 recovery from February 12 to 17.

This bodes well for companies with lots of cash and a high credit rating, but it does not bode well for the battered energy sector. As a result, I was buying a lot of high-quality dividend growth stocks last week.

So, in summary, corporate stock buy-back activity, bargain hunting, and investors seeking high yields in quality dividend stocks have temporarily put a floor under the stock market. We are not yet entirely out of the woods, but stock picking remains much more crucial to an investor’s success than sector selection.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

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