One of the key drivers of the
rebound has been the surge in companies upsizing their share repurchase
programs. When companies buy back their shares, they shrink the
shares-outstanding figure we find on the income statement. Such a move leads to
more favorable earnings-per-share (EPS) comparisons. Think about it:
buying back shares doesn’t change a company’s net income. It just
reduces the number of shares that are divided into net income to compute the
earnings per share for a given quarter. If you were to
think those share buyback programs could help artificially inflate the earnings
growth rate, you would be correct…..
Despite the market’s rebound during
the last few days, much of the
economic data we’ve been getting points to further softening in the economy.
For example, the February reading for the Empire Manufacturing Survey from the
Federal Reserve Bank of New York came in at -16.6 with continued contractions
in new order activity during the month.
This
morning, Feb. 17, we received the Fed’s January reading on Industrial
Production. While the metrics were up month over month, if you dug into the
report, you would have seen that total industrial production was down 0.7% year
over year. Moreover, most of the month-over-month strength was due to the jump
in utility activity in January. That makes sense and I can attest firsthand to
winter’s belated arrival in the latter part of December as I shoveled snow that
fell more than 34-inches deep on my driveway.
As long as we
continue to get economic data that raises concerns about growth expectations,
either for the economy or for a company’s earnings, we’ll continue to sit on
the sidelines and collect our dividends as we wait for even more attractive
entry points on growth-oriented stocks.
