Other thoughts
I’ve had 2 good conversations with the CEO of C-Com Satellite recently. I’m getting more bullish on the sector, and this is an interesting one to keep a close eye on. The space is heating up and the company has some new products that could be quite game changing. We’ve scheduled an SCD zoom call with them for this upcoming week.
I’m not a mining guy but if I were I’d be watching the uranium space. Lots of uranium stocks hitting new 52-week highs. Looks like the long suffering sector is getting hot……maybe even nuclear….
Other Stuff
“When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” Warren Buffett Berkshire Hathaway 1984 Annual Report
I’ve been thinking a lot more lately about what can help reverse some of the low valuations in our microcap universe. Clearly, it’s a function of supply and demand. There just isn’t enough qualified and substantive buying. Institutions are staying upmarket. Smaller retail investors, especially speculators, are cash poor, low liquidity is keeping aware large more sophisticated retail investors on the sidelines or forcing them to concentrate on the more liquid, larger nanocaps. Who has cash and a willingness to buy, even in small increments? Companies with cash and cash flow do, that’s who.
Some of the best performing stocks over the past year are companies that have an active share buy back plan in place. Think AirIQ (IQ.V), Cipher Pharma (CPH.T), Firan Technologies (FTG.T) and Atlas Engineered Products (AEP.V). Other companies like BeWhere (BEW.V) have held in well partly because of their share buying.
In some cases, these companies have been buyers of last resort when times were very bleak the past 2 years. Purchases, that have in some cases, have returned over 50% in the past year. Hard to imagine a better use of capital for many of these companies.
There are a few reasons why a company should consider buying back its shares. Four primary reasons companies usually cite for buying back their stock: signaling the shares are undervalued, managing earnings per share, offsetting dilution from option programs, and increasing financial leverage.
But the biggest reason a company should consider repurchasing its shares is when its stock is trading below its expected value and when no better investment opportunities are available.
If price is truly below value, a buyback transfers wealth from selling shareholders to continuing shareholders. It cleans up the float strengthening its remaining shareholder base. Share buybacks can be a great investment for a company and its shareholders.
The idea that, “no better investment opportunities are available,” addresses a company’s priorities. Buybacks may appear attractive, but reinvesting in the business may provide a better opportunity. Value-maximizing companies fund the highest return opportunities first. While buybacks may be the best option for creating further shareholder value sometimes it’s a sign that the company’s options are limited.
But in this current environment of cheap and mispriced microcaps it’s hard to imagine a better option for excess cash. A stock trading at sub 10 times earnings shouldn’t be sitting on cash generating low single digit interest rate returns especially if it’s not able to grow its business at that rate.
A company’s share buyback should be of interest to investors. In most cases, it’s a signal that management and board believe the shares are undervalued and along with direct insider buying should at least generate interest from the savvy investor to look deeper.
Existing shareholders should view a good share buyback as a way their own personal percentage of the business is increasing. You now own a slightly larger percentage of the shrinking share count. You own more of the continuing cash flow generated by the business. The earnings per share increases even if the actual earnings stay flat. It also increases the percentage own by insiders, slowly increasing their alignment with the rest of the shareholder base.
Announcements of share buybacks can be great indicators of a potentially cheap stock but be aware that sometimes some less scrupulous companies will announce share buybacks simply for the optics, to mislead investors and existing shareholders. A share buyback is useless if it’s not put into action. I’ve seen plenty of times where a share buy back is announced but no shares are purchased even though the stock hasn’t moved up in price.
I find it telling sometimes when I speak with management teams and ask about share buy back programs. Mostly it’s me asking why they don’t have one in place. The answers I usually get revolve around lack of understanding the benefits and/or the further reduction of liquidity and trading volumes. The lack of liquidity argument is a weak one for me. Many of these small companies will continue to lack liquidity until their business grows enough to attract bigger buyers and sometimes that won’t happen until overall market conditions improve, something that is out of control of the company. It’s exactly because of this low liquidity that a company should consider a buyback, especially if the market is not placing a proper value on the company. Give the market confidence that you believe the stock is cheap and are the buyer of last resort if necessary.
