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The Last Shareholder
If these buybacks continue, I may be the last shareholder left.
Travis Hoium
August 11, 2024
One of the themes in the Asymmetric Portfolio in the Q2 2024 earnings season has been outstanding results, increased guidance, and a stock crash.
General Motors, MGM Resorts, and Crocs all suffered the same fate. Why am I excited about the drop in the stock? I’ll get to that below.
As for the market, it seems like an eternity ago, but on Monday the market woke up to an absolute bloodbath. I covered how the yen carry trade was to blame, but that was almost forgotten by the week’s end.
The Asymmetric Portfolio had another volatile week and earnings reactions were mixed. Despite the market’s reaction, every single company that reported this week beat their estimates. Fundamentals are strong. Market vibes are weak.
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In Case You Missed It
Here’s some of the content I put out this week. Enjoy!
Robinhood’s Retirement Push: Robinhood’s earnings weren’t just impressive, they showed a push into new products for wealthier investors.
Hims & Hers Growth Is Picking Up: If you like growth, this is a stock to keep an eye on.
Airbnb Stock: Investing In What We Can’t See: Airbnb stock is down because investors see less potential in the business we know today. But what about what isn’t yet built?
The Yen Carry Trade Explained: Why markets crashed on Monday.
Why Buybacks?
Buying back stock gets a bad rep in the media, but it’s a pretty simple component of capital allocation, whether we’re talking about public or private companies.
Sell stock when you need money.
Buy it back when you want to pay back investors.
If you own a small business 50/50 with a partner and want to buy them out, one way to do it is simply buy their stock so you own 100% of the company.
Public companies are the same.
There are two ways for companies to return cash to shareholders: Dividends or Buybacks!
Depending on the price, buybacks can be an extremely attractive way to return capital to shareholders.
Buying Stock at the Right Price Is Critical
A lot of companies talk about buybacks, but very few of them execute them effectively.
To make the most impact, buybacks need to be done at a low enough price that there wouldn’t be better uses of cash either within the business or by paying a dividend, which could be reinvested by the investor. A low P/E multiple can indicate a good buyback, but I like free cash flow yield:
Free Cash Flow Yield = FCF / Enterprise Value
The higher the free cash flow yield, the better the buyback…assuming free cash flow is sustainable.
Bad Buybacks
A low free cash flow yield means you’re buying back the stock at a high price, which is often a waste of money.
For example, NVIDIA has bought back $51.1 billion in stock since 2019 and the share count is flat. That’s not a good buyback and they’re buying back more the more expensive the stock gets.
Asymmetric Investing in Buybacks
Three companies in the Asymmetric Portfolio that are aggressively buying back stock at an attractive price are GM, MGM, and Crocs.
You can see below that GM has bought back about a quarter of its shares (actual shares outstanding at the end of Q3 was 1.12 billion) in just the past two years. Right now, its FCF yield is about 20% and management is buying back aggressively.
MGM’s stock trades for about 4.5 times adjusted EBITDA, a proxy for cash flow from a casino. And you can see that management is buying back about 13% of shares annually. I have a hard time seeing how a business in a supply-constrained environment isn’t a great buyback candidate at that price.
Crocs has proven to be more durable than investors (including myself) thought and is now buying back stock with a FCF yield near 10%. Management is also buying back debt to reduce leverage on the balance sheet.
What’s interesting about these buybacks is they haven’t done much to move their stock prices. All three saw shares slip over the past month, despite strong earnings.
The good news is, that management is using the lower stock price to buy back even more stock.
Eventually, if these trends continue, I may be the only shareholder left.
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Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
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