The beginning of this year looks really unsuccessful for stock markets and investors so far. Concerns about the recession have fueled several months of declining major indices in the United States. This is at a time when the US Federal Reserve (Fed) has taken the most aggressive tightening of monetary policy since 2000 in the fight against inflation.
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The Russian invasion of Ukraine and the slowdown in economic growth in the USA, China and elsewhere in the world also contribute to the negative mood in the markets. Rising interest rates have reduced the attractiveness of technology and growth stocks in particular, as can be seen in the Nasdaq index, in which these stocks are represented.
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For the reasons mentioned above, the share prices of many American companies have fallen by several tens of percent since the beginning of the year.
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The broadly monitored S&P 500 index fell about 13 percent in the first five months of this year, while the Dow Jones Industrial Average is down about nine percent since the beginning of the year. At the same time, the declines were a little deeper a few days ago.
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However, the Nasdaq technology index is far worse, with its titles reacting very sensitively to rate hikes. Technology companies are heavily dependent on loans, which make them more expensive.
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The fall of the technology index from the November peak briefly surpassed the pandemic sell-off of March 2020. Its almost 30 percent decline was the worst since this indicator fell by more than 50 percent at the peak of the global financial crisis in 2008. This year, the Nasdaq index is currently losing about 22 percent.
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Nasdaq index falls.
However, this may not be bad news for companies with enough cash. Falling stock prices allow companies to buy more of their own shares, which reduces the number of shares in the market and at the same time increases earnings per share, an indicator that investors are closely monitoring.
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Companies that are considering buybacks due to falling prices include network equipment maker Cisco Systems. “Looking at our share price, there seems to be an opportunity for a more aggressive approach,” he told the newspaper. The Wall Street Journal Scott Herren, Cisco Chief Financial Officer.
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Cisco generates approximately $ 12 billion to $ 14 billion in available cash annually, of which about $ 6 billion is paid out in dividends and the rest for business investment and share repurchases. Cisco shares currently cost about $ 45, but are down 28 percent since the beginning of this year.
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What is value and growth stock
There are two other investment strategies for stocks.
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The so-called value investing aims to determine the theoretical or intrinsic value of the share on the basis of all available data, to compare it with the current market value, to decide whether the share is undervalued or overvalued, and to buy or sell it accordingly.
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On the other hand growth investment means investing in stocks that, according to current analyzes, are not profitable (do not make a profit or pay dividends), but for which high growth potential can be expected in the future. Growth investment became a hit at the end of the 1990s, when, in connection with the enormous development of communication and industrial technologies, investors relied on high share price growth for technology companies, which did not happen in the future.
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A difficult task
According to advisors and analysts, finding the right time to buy back shares is a difficult task and rarely succeeds.
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“Much of the repurchases are made by companies that shouldn’t,” said Greg Milano, CEO of Fortuna Advisors, which advises companies on capital allocation. According to Milan, companies should consider repurchases only after investing in their business, increasing dividends and paying off debt.
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“Very few companies have a truly professional way of deciding whether to increase or decrease repurchases,” adds Milano.
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Did the stock bottom?
The US investment bank JPMorgan believes that the stock market could be close to its bottom due to the continued buyout of shares by companies.
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According to her, the number of share repurchases by companies increased significantly during the ongoing decline in stock markets, and a record number of repurchases was announced this year.
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“At the last sale, we estimate a three- to four-fold higher realization of repurchases than the trend,” said strategist Marko Kolanovic of JPMorgan.
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So far, S&P 500 companies have announced a record $ 429 billion buybacks so far this year. According to Kolanovič, this level represents a stronger year-round pace than in 2019 and 2021.
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In the first quarter of this year, the volume of repurchases increased by 45 percent year on year and by three percent quarter on quarter. Much of this growth was in the technology, financial and healthcare sectors, where share repurchases reached $ 62 billion, $ 49 billion and $ 39 billion, respectively.
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What are share repurchases
- In addition to dividends, share repurchases are another form of return of capital to the company’s shareholders, during which the company buys its own shares. Companies usually buy them through the stock exchange and then usually reduce their share capital, but they can also hold them for other purposes.
- The share of shareholders who keep their shares will thus increase. Likewise, their share of profits will increase, for example, as the total number of shares outstanding decreases. Shareholders who sell their shares to the company, on the other hand, will receive cash.
- The main motive for the repurchase of shares is the same as for dividends – optimizing the capital structure of a company with excess cash or too low debt.
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Energy companies have also significantly increased their share repurchase activity as they benefit from higher oil prices – in the first quarter of 2022, the sector repurchased $ 9.5 billion in shares, compared to $ 500 million in the first quarter of 2021.
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At the same time, JPMorgan believes that increased share repurchase activity is not exaggerated and is likely to continue as companies continue to generate strong cash flows with solid margins, even at a time that many market participants see as increased. recession risk.
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JPMorgan also estimates that end-of-month portfolio adjustments will lead to rising stock performance in the coming weeks as retirees sell bonds and buy stocks. This, combined with the worst investor sentiment since the Great Depression and a strong share buyback, gives JPMorgan the belief that the bottom of the stock market is close if it has not already been reached.
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