Financial topics

[Higgenbotham]

From there, I investigated which other big name stocks were hit today and saw Philip Morris was down 15% on earnings news. That's another favorite of dividend investors (also listed in above link).

Due to these hits, I calculated the yields on these two stocks have gone from about 4.3% to about 5% in the past two days.

Dividend stocks were hit a bit more than the general market today, probably due to the increase in the 10 year note yield. The typical decline I saw on such stocks was about 1% today.

[aeden]

The agency problem we discussed.

[Higgenbotham]

As noted a few weeks back, the Silents are heavily and inappropriately invested in stocks. Altria Group and Phillip Morris are probably the kinds of stocks the Silents like to own. A 15% decline on a stock yielding 4.3% is going to be quite unwelcome to a Silent who has lost over 3 years of yield in one day and may have less than 10 more years to live (especially if they own a lot of Phillip Morris and look at their stock price tonight). One look at that may be enough for a risk averse Silent to sell everything in their portfolio.

[Higgenbotham]

I would be remiss not to repeat something posted a few weeks ago. Two days after earnings are released, the buyback window opens back up and companies are then free to purchase their stock. Also noted previously is that most of the benefits of the tax cuts are going to share buybacks.

That reminds me of something I read a couple months ago. In speculating on why the market cracked when it did, It was mentioned that there is a stock buyback moratorium around the time a company reports.

Under SEC rules, companies can't buy back any of their shares during the roughly five-week period which ends two days after the company's results are released.

https://www.cnbc.com/2017/02/23/one-way ... eriod.html

As to why that is important now in particular,

But now, courtesy of Goldman Sachs, we know where the tax cut is really going. Surprise! It’s paying for stock repurchases by corporations, as Corporate America despairs of investing in much other than dividing the pie provided by near-record profitability into fewer and larger pieces.

Buyback announcements are up 22% this year to $67 billion in just six weeks, Goldman said in a note to clients.

https://www.marketwatch.com/story/now-w ... 2018-02-22

[John]

> I would be remiss not to repeat something posted a few weeks
> ago. Two days after earnings are released, the buyback window
> opens back up and companies are then free to purchase their stock.
> Also noted previously is that most of the benefits of the tax cuts
> are going to share buybacks.

As I understand it, stock buybacks push stock prices up because
buybacks increase demand (companies buying more stock) and decrease
supply (taking stock shares out of the market). Right?

[Higgenbotham]

> I would be remiss not to repeat something posted a few weeks
> ago. Two days after earnings are released, the buyback window
> opens back up and companies are then free to purchase their stock.
> Also noted previously is that most of the benefits of the tax cuts
> are going to share buybacks.

As I understand it, stock buybacks push stock prices up because
buybacks increase demand (companies buying more stock) and decrease
supply (taking stock shares out of the market). Right?

Right, so to get a complete feel for how earnings are affecting stock prices, it would be necessary to track the effect on the day earnings are released, then follow up to see if the companies are generally taking advantage of that average 5% dip on the day earnings are released (that the analyst notes in the article I posted earlier this evening) to put their excess cash to work buying back shares starting two days after earnings are released.

[John]

> Right, so to get a complete feel for how earnings are affecting
> stock prices, it would be necessary to track the effect on the day
> earnings are released, then follow up to see if the companies are
> generally taking advantage of that average 5% dip on the day
> earnings are released (that the analyst notes in the article I
> posted earlier this evening) to put their excess cash to work
> buying back shares starting two days after earnings are
> released.

So if I'm correctly interpreting what you say, then other investors
would have two days to buy the dip, which would push prices up and so
stock buybacks would no longer be cheap. Conversely, if no one buys
the dip in the two days, it must mean that investors think the stock
isn't worth much, and so the company might as well do the buybacks in
the hope of convincing investors otherwise. Right?

[Higgenbotham]

> Right, so to get a complete feel for how earnings are affecting
> stock prices, it would be necessary to track the effect on the day
> earnings are released, then follow up to see if the companies are
> generally taking advantage of that average 5% dip on the day
> earnings are released (that the analyst notes in the article I
> posted earlier this evening) to put their excess cash to work
> buying back shares starting two days after earnings are
> released.

So if I'm correctly interpreting what you say, then other investors
would have two days to buy the dip, which would push prices up and so
stock buybacks would no longer be cheap. Conversely, if no one buys
the dip in the two days, it must mean that investors think the stock
isn't worth much, and so the company might as well do the buybacks in
the hope of convincing investors otherwise. Right?

I'm not sure how the companies deploy their buyback commitments. In other words, the language I see describing buybacks talks about so many dollars of commitment over so long of a time period. My understanding is that allocation becomes fixed once it is committed to. I think they then try to get the shares as cheap as possible within the allowed window.

Back to your comment. My observations aren't all encompassing because I filter most stocks out and never look at them. The stocks I filter out tend to be stocks that have buyback programs because buyback programs tend to raise share prices higher than they ought to be. In my limited observations, if someone tries to categorize what happens, three things can happen when a stock gets hit on earnings news:
1. The stock gaps down and is immediately bought the first day (often hot momentum stocks);
2. The stock gets hit for two days and then recovers (often stocks that are good value); or
3. The stock gets hit for two or more days, stages a brief recovery, then goes down more after that (often stocks that have or are falling into disfavor).

"So if I'm correctly interpreting what you say, then other investors
would have two days to buy the dip, which would push prices up and so
stock buybacks would no longer be cheap..."

These tend to be the hot stocks. They probably weren't even cheap when they dipped and were reflexively bought.

"Conversely, if no one buys
the dip in the two days, it must mean that investors think the stock
isn't worth much..."

These tend to be more value stocks and I'm often amazed to see how much these stocks can get pummeled on great or decent earnings before cautious value investors will step up to the plate. I have no idea what Phillip Morris earned but it might be astonishing to see the pounding that stock continues to take, even if the earnings were decent, once that pounding has commenced and the herd starts mindlessly bolting through the crowded theater while cooler heads look for bottoming signs and cautiously buy a little.

[Higgenbotham]

Out of favor stock hit on an earnings miss - most like 3 on the list. Bed Bath and Beyond. PE is listed at 5.8. The company gave next year earnings guidance around 2.35, or PE ~7. The stock staged a brief recovery, then collapsed again.

[Higgenbotham]

Bear of the Day: Bed Bath & Beyond (BBBY)
Neena Mishra April 19, 2018
BBBY

https://www.zacks.com/commentary/158674 ... eyond-bbby

The beatings will commence and recommence until New York and Chicago extract every drop of blood from this turnip.