Buybacks

Buyback by a company definitely gives an indication that the
management thinks the company's stock is undervalued. However it can
not be sole criteria in deciding whether the stock is truly
undervalued. This is because most management has high sounding notions
about greatness of their companies and frequently go overboard in
their estimations of worth of the company. Also the buyback means that
the company does not have other avenues of deploying its cash in the
operating business. Still buyback can enhance return on networth and
EPS if the pricing of buyback is right.

There have been instances in india where the rogue managements have
used buybacks from open market to jackup the prices of their stocks.
One has to be careful to avoid such companies.

However the buyback defintly demands closer look on companies
financials. My experience with buyback has been very interesting. In
my case the buybacks were announced, most of the time, after I've
taken position on a stock. It did substantiate my views. For instance
I had when I had bough Sterlite it was quoting at half its book values
and 4 time its profits. Then Sterlite announced buyback of 25% shares
at 200. It later revised it to buyback 50% stock at 150. It was a very
smart move on part of Anil Agrawal(promotor) and very dumb move for
those who sold their stock to the company. The same stock now quotes
at 514*2(bonus). There were other inatances like Reliance,Britannia,

So investors can use buyback as a trigger to start investigating more
about the stock and only they would find that the company is realy
underpriced the investment should be done.

Posted: Aug 7, 2004
http://in.groups.yahoo.com/group/lawarrenbuffet/message/817