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As Share Buybacks Become Radioactive, These Companies Will Hurt The Most

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As Share Buybacks Become Radioactive, These Companies Will Hurt The Most

Over the past 11 years, companies in the S&P 500 have paid $0.90 of every $1 in profit back to shareholders in the form of stock buybacks or dividends.

According to Chamath Palihapitiya, chief executive of venture-capital firm Social Capital LP, that amounts to roughly $7 trillion that companies don’t have on-hand today to help them weather the current economic storm brought on by the coronavirus pandemic.

“When you do things like buybacks and dividends, what you are essentially saying is, you are throwing your hands up in the air and declaring to the world: “I do not know what to do with this money.’ Instead of deciding to save that money to try and do M&A, to try and do R&D, to pay your employees more, these people have given it back in an open-market purchase,” he said.

And now those very same companies are the ones lining up, hoping for a bailout by the government.

“I just think that kind of behavior makes no sense, and instead of being punished, it has been rewarded. Why aren’t all these companies trying to figure out how to be more resilient?” Palihapitiya asked.

What to Expect

Goldman Sachs expects that companies will reduce share buybacks by 25% in 2020 versus 2019. He thinks it’s partly due to shrinking cash flow amid the coronavirus pandemic leaving them unable to afford large buybacks. However, it’s also due to criticism that companies have received for giving back so much money over the last 11 years and now turning to the government for help.

“Buying back stock was all the rage, but could become passé, like leisure suits,” wrote Jeffries equity analysts Steven DeSanctis and Eric Lockenvitz, in a note yesterday. “The frenzy around the outrage over buybacks has calmed down, but we don’t believe companies will be talking about it anytime soon.”

The two pointed out that share repurchases have been a significant driver of earnings-per-share growth in the S&P 500 for the past five years.

Without share buybacks, earnings growth over the last five years would have been 5.1% But with the help of buybacks, earnings growth jumped to 6.3%, a 23% increase.

The slowing or eliminating of buybacks could reveal which companies are only capable of showing earnings-per-share growth by shrinking the “share” portion of “earnings-per-share.”

Thirteen Stocks

The Jefferies analysts selected 13 stocks that “took advantage of buybacks” to increase EPS growth “but had to raise leverage to do so.”

The companies are Dunkin’ Brands Group Inc. (Nasdaq: DNKN), IHS Markit Ltd. (NYSE: INFO), Hilton Worldwide Holdings Inc. (NYSE: HLT), Marriott International Inc. (Nasdaq: MAR), Yum Brands Inc. (NYSE: YUM), Ross Stores Inc. (Nasdaq: ROST), Booking Holdings Inc. (Nasdaq: BKNG), Mettler-Toledo International Inc. (NYSE: MTD), Illinois Tool Works Inc. (NYSE: ITW), Citrix Systems Inc. (Nasdaq: CTXS), Waste Management Inc. (NYSE: WM) FleetCor Technologies Co. (NYSE: FLT), and Waters Corp. (NYSE: WAT).

The analysts stopped short of saying these companies are due for their stock prices to fall when they can no longer shrink the number of outstanding shares. Additionally, some may be willing to continue buybacks, despite the poor optics of doing so.

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SPACs Are Red Hot, Here’s One You Probably Want To Avoid

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SPACs Are Red Hot, Here’s One You Probably Want To Avoid

Last week we discussed SPACs, or special purpose acquisition companies, the red-hot investment trend that has taken off like a rocket this year.

According to Renaissance Capital, in just the last 9 days, 14 SPACs have filed to raise a sum of $5.5 billion. Year-to-date, there have been 57 SPACs created and combined they have raised $21.3 billion in the IPO market. This includes Bill Ackman’s $4 billion Pershing Square Tontine Holdings Ltd.

For comparison, last year a total of 59 blank check companies raised $12.1 billion. This was considered a record at the time. So with almost four full months left this year, we’ve nearly exceeded last year’s total.

“We’re about to break last year’s full-year SPAC IPO count of 59, the highest number in a year ever. And based on recent filings, activity is only going to increase heading into the fall,” said Matthew Kennedy, a senior strategist at Renaissance Capital.

We pointed out a few promising SPACs in last week’s article. However, a recent filing is one that you definitely want to avoid. It also highlights the importance of doing due diligence before you invest.

Investing in SPACs Wisely

A company called Burgundy Technology Acquisition Corp. filed a preliminary prospectus last week. It said it is looking to raise $400 million. Burgundy will be led by former Hewlett-Packard and SAP AG Chief Executive Leo Apotheker. Apotheker will also be co-CEO of Burgundy along with former SAP colleague James Mackey.

Unless you are a student of Hewlett-Packard history, you likely don’t remember the tenure of Apotheker, which only lasted about a year. That’s because while he was CEO, Apotheker oversaw what many consider to be one of the worst, if not the absolute worst, acquisitions in corporate history.

Hewlett Packard acquired a data analytics software company called Autonomy for $11 billion. Before the deal even closed, Chief Financial Officer Cathie Lesjak expressed concerns about the hefty price, yet Apotheker pushed on to close the deal. There were even concerns about Autonomy’s aggressive accounting tactics.

The end result is that Apotheker was fired a little more than a month after the deal was closed and Hewlett-Packard wrote off $8.8 billion of the purchase price less than a year later. The company admitted it had substantially overvalued Autonomy, and nearly a decade later, lawsuits are still pending over the acquisition.

Most appalling, in his testimony as part of the numerous lawsuits, Apotheker admitted that he never bothered to read Autonomy’s most recent financial results before signing the deal, which lawyers pointed out would have taken him about 30 minutes.

“I was running a $125 billion company, sir, and minutes are pretty precious,” Apotheker testified.

Now he’s back, hoping to have a $400 million blank check to go looking for a company to acquire.

This time around, will he take the time to read financial statements?

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It’s Not ‘Unreasonable’ To See Gold Prices Soar To $4000 During Bull Market

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It’s Not ‘Unreasonable’ To See Gold Soar To $4000 During Bull Market

Despite gaining 35% this year, gold prices have plenty of room to run, says Michael Cuggino, the CEO of the Permanent Portfolio Family of Funds.

Cuggino says that since gold formed a triple bottom from the end of 2015 through November of 2018, it has consistently climbed higher and has really soared this year.

“Ever since then, it has been a gradual move up, then some down. It moves sometimes in big chunks, gives some back, sits around and does nothing, reacts to stimulus, inflation, the value of dollar and euro … but it has had an aggressive move this year,” Cuggino said.

Possible Setbacks Along the Way?

With gold climbing so quickly in a relatively short period of time, Cuggino warns there could be sharp pullbacks along the way. But he says the overall trend is for higher gold prices.

Cuggino says the recipe of continued money printing by the government, the dollar steadily declining and growing inflationary fears mean it would “not be an unreasonable move” to see gold prices soaring to $4,000 an ounce.

He points to a metric that compares gold prices to the closing levels for the S&P 500 index. Gold is currently trading at 0.6 times the level of the S&P 500 and it hasn’t climbed above 0.7 since 2014. But when you go back to August 2011, gold traded as high as 1.7 times the S&P 500, so there’s plenty of upside for gold prices.

Gold Still Has a Long Way to Go

Just adjusting for inflation, gold would need to climb above $2,800 per ounce to equal 1980 levels, which means this gold rally has a long way to go.

Mike Shedlock, the Mish Talk blogger and investment adviser at SitkaPacific Capital Management, thinks the fuel that could push gold to $2,800 per ounce could come from all the hedge funds that are currently on the sidelines and missed the early innings of the gold rally.

“There is ample room for Fear of Missing Out to kick in as the managed money and big spec hedge funds sat out much of the recent rally,” he writes. “And with 105,025 short contracts there is plenty of fuel for a short squeeze too.”

E.B. Tucker, director of Metalla Royalty and Streaming, believes that the current rally will continue, and he thinks gold prices could hit $2,500 by the end of the year.

“Normally I would say [the bull run is overheated] but what I’m seeing in the daily action is that gold is rising in a very measured way and is not meeting much resistance, so when that’s happening you just step out of the way and let it go, that’s what you do,” Tucker said.

Like Cuggino, Tucker says there could be pullbacks in price along the way, but he says we’re in a secular bull market like we may never see again.

“This is a secular bull market. This is a bull market in gold that you’re probably never going to see in the course of your life again.”

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Nasdaq Sets A New Record, Dow Forms A ‘Golden Cross’

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Nasdaq Sets A New Record, Dow Forms A ‘Golden Cross’

Since bottoming in late March, the stock market continues to set records in what seems like an almost invincible climb higher.

Nevermind that Jim Cramer said the rally is being driven by the “power of enthusiastic buyers who do not know what they’re doing” and that he can’t fathom “how stupidly bullish this market can be,” the fact is that stocks are climbing higher.

The latest evidence for a runaway stock market is that the Nasdaq Composite Index just gained 1,000 points. It happened in the shortest amount of time in the last 20 years.

1000-Point Climb

It took 114 days for the index to climb from the 9,000 level to the 10,000 level. That milestone was hit on June 10 of this year.

In just 40 days since, the Nasdaq has tacked on another 1,000 points, climbing above the 11,000 level.

That is the fastest 1000-point gain for the index since it took a blistering 38 days in 1999. Back then, it climbed from the 3,000 level to the 4,000 level.

You might recall that period, it was during the dot-com bubble. We know how that ended.

Today’s 1000-point climb is only a 10% overall gain (from 10,000 to 11,000) compared to the 33% overall gain during the ‘99 surge (from 3,000 to 4,000). However, it’s still a blistering pace that investors pay attention to.

“Although 11,000 by itself doesn’t mean much, these big round numbers are a nice reminder of just how strong this rally has been since the March lows,” said Ryan Detrick, the chief investment strategist at LPL Financial.

A ‘Golden Cross’

Not wanting to miss the fun, the Dow Jones Industrial Average just flashed its own bullish signal to investors.

The index just formed a “golden cross,” where the shorter-term 50-day moving average crosses above the long-term 200-day moving average.

Investors consider this to be a bullish signal for the index, as it shows the short term momentum is strong.

Conversely, when the 50-day moving average crosses below the 200-day it’s called a “death cross” and is a bearish indicator. The last “death cross” was on March 20. On that day, the stock market was pummeled by the economic shutdown caused by the coronavirus pandemic.

With the rally being led by technology stocks, the Nasdaq – which is more than 50% tech stocks – has gained more than 60% since the March lows. The S&P 500 is made up of about 25% tech stocks and has gained nearly 50% since March, and only 20% of the Dow is tech stocks so it’s lagged behind, gaining only 47% since March.

How reliable is the “golden cross” for stocks to move higher? According to Dow Jones Market Data, the last time a “golden cross” failed was in January 2016. That was also the last time the market slipped lower.

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