Investors may be losing their taste for buybacks.
In a note Friday, UBS strategist Julian Emanuel pointed out that “companies with substantial share buybacks, as a rule of thumb, have tended to outperform the broader index,” but “if we take a closer look at the most recent trends, outside of a couple months, the trend appears to have reversed course in 2015.”
For Emanuel, this is has a lot to do with expectations about the Federal Reserve’s next move. After all, in a rising-rate environment, investors become less enthusiastic about the prospect of companies borrowing money to support their share prices. For that reason, “investor sentiment around an increased likelihood of higher rates on the back of positive incoming economic data will continue to challenge the long-held belief that all buybacks are good.”
For Boris Schlossberg of BK Asset Management, the effectiveness of buybacks has simply been eroded over time, as share counts at some of the big buybackers have diminished.
“At this point, I think investors want dividends. They want organic growth and they want money back. They don’t want less shares,” Schlossberg said Friday on CNBC’s “Trading Nation.”
From a strategist perspective, Emanuel writes that “simply buying companies with the largest buybacks was a reasonable strategy,” but “as we enter the later stages of the current bull market and interest rates are expected to rise, we believe selectivity is even more important.”
At this point, Emanuel’s favorite share-repurchasing companies are those that are trading at reasonable valuations and are “higher quality,” meaning they have high profit margins and return on capital and low volatility.
Included on his list are Ralph Lauren, PepsiCo, Gilead and Apple.
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