Here's What 'Shrinking the Float' Means for Stocks and the Market

Across my career in the financial markets, it has been fascinating to see relatively arcane financial concepts become part of the mainstream discourse... One of the biggest of these was "mortgage securitization," a main factor behind the housing collapse in 2007 to 2008. I'm betting just about no one outside of a very narrow part […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Here's What 'Shrinking the Float' Means for Stocks and the Market By Enrique Abeyta --------------------------------------------------------------- [The Elon Musk Story No One's Telling]( While Elon deals with Twitter, satellite internet, SpaceX, Tesla and everything else you've likely heard about lately... Another Elon story has been playing out behind the scenes... That Elon has been quietly leveraging a brand new "secret currency..." A secret currency that the International Monetary Fund predicts could rise as high as 24,900%. [Click here for all the details](. --------------------------------------------------------------- Across my career in the financial markets, it has been fascinating to see relatively arcane financial concepts become part of the mainstream discourse... One of the biggest of these was "mortgage securitization," a main factor behind the housing collapse in 2007 to 2008. I'm betting just about no one outside of a very narrow part of Wall Street had ever even heard the word "securitization" before that. Currently, one of the most heated mainstream debates is around stock buybacks... and the shots are flying! Before we go further, let's revisit the definition of a stock buyback... Companies have a defined number of shares outstanding (for our example, let's say 100), and for publicly traded companies those are usually free to trade. If a company has cash it wants to spend – no matter where that cash is coming from – it could go into the open market and buy some of those shares. Let's say the stock is at $10 per share and the company wants to buy 10 of its own shares... That means it would spend $100 on "buying back" those shares. The company can then "retire" these shares, leaving it with 90 shares outstanding. The big question is, does this create any economic value? --------------------------------------------------------------- Recommended Link: [You'll never guess where we went...]( Empire Financial Research is about to make a historic first in our business... We are flying 1,374 miles, from Baltimore to a special location handpicked by Whitney Tilson. We hired a full film crew to document all the details of this historic situation. And YOU get to join us in the journey... For the first time ever, Empire Financial Research is going "on location" with a special investigation... For the first time ever, Whitney Tilson is revealing a new opportunity that could pay off 10 times in the next 12 months. And it all begins with a visit to this mystery location. You'll see what we see. You'll experience what we experience. Our cameras captured everything about this location, and how it's key to seeing this 1,000% opportunity. [Go here now to see the full investigation](. --------------------------------------------------------------- Like most of these types of questions, there are different factors to consider... In theory (and mostly in practice), if there's constant demand for the shares, then the share price should go higher. Per our example, let's say 100 investors are willing to pay $10 per share and now there are only 90 shares available. Do the 10 investors who now can't get a share (because of the retired shares) go out and offer a higher price? The reduction of the share count is called "shrinking the float," and historically companies that have aggressively shrunk their share floats have been very good stocks. A great example is the stock of auto repair retailer AutoZone (AZO). Take a look at the stock since 2010... This has been an amazing stock... AZO shares have gone from around $163 in 2010 to roughly $2,500 today, or more than 15 times higher in a little more than a decade. Next, take a look at AutoZone's net income since 2012... The company has an impressive track record, growing earnings by 2.4 times across the past decade. Still, that's far short of the stock's growth over the same time frame. However, if we look at its share count, we can see how aggressively AutoZone has been buying back the stock... Across the period where it grew earnings by 150%, AutoZone also reduced its share count by almost 50%. The net result is that its earnings per share ("EPS") soared! Take a look... As you can see, EPS went up by almost 5 times in this same time frame. Essentially, investors have rewarded AutoZone for its consistency by giving its earnings a higher multiple. Investors reward success. This is obviously an example of a buyback that has been great for shareholders. In fact, it's one of the most successful buybacks in financial history. But is this the norm? Therein lies the problem... The first question is whether the company would have been better off investing in its business instead. Would the stock have gone even higher with even higher earnings power? This is hard to argue, because AutoZone did grow its earnings by 150% in a relatively mature U.S. market for automobiles. The argument that companies are better off investing in the business is the most common criticism of buybacks, but it suffers from one of the greatest fallacies we see in financial analysis: that outsiders can make better judgements than management teams in terms of running the business. Management teams aren't perfect, but the overwhelming majority of them did not get there by accident. They are skilled professionals who also have much more information than any outsider. What is most galling, honestly, is that financial analysts and politicians who criticize them are completely unqualified to be making these kinds of determinations. The vast majority of them have never run anything, much less a large publicly traded company. One of the best aspects of our financial system is that these companies also have a board of directors, with several of them being independent of management. Significant laws and regulations also govern these boards. The system isn't perfect, as there are still mistakes made and even sometimes frauds... but overall it works very well. There are "checks and balances" in place to make sure the interests of shareholders – and increasingly, employees – are properly served. Almost always, a company that's buying back stock would rather invest more in the business if it had the opportunity. The share buyback, however, is an accurate view of its investment opportunities. Another criticism is that share buybacks are simply 'financial engineering' and don't create any 'real' value... Frankly, this doesn't make sense. Pretty much every aspect of running a company's balance sheet – issuing shares, issuing debt, paying debt down, etc. – is "financial engineering." And the argument about "real" value runs into our discussion above about the demand for shares. Also, I've said it time and time again across my publications here at Empire Financial Research: Ultimately, stocks are just pieces of paper. Sure, shareholders technically own the cash flows of the business... but those cash flows are very seldom paid out to shareholders. Shareholders look at companies that successfully buy back their stock as shrinking the supply, feeding into a relatively constant demand... This should (and most often does) create buyers who are willing to pay more for the stock, and as a result, the shares go higher. This has certainly been the case with AutoZone's stock... When properly executed, share buybacks are great for shareholders and are a strong net positive for the stock market and economy overall. Regards, Enrique Abeyta March 2, 2023 P.S. In the latest edition of my Empire Elite Trader service, just published yesterday, I recommended two new trades on past winners that readers who followed my advice on booked an average return of 11.6% in about two months. These two stocks just recently flashed another set of "buy signals" – find out how to get instant access to these brand-new trades [right here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 380 Lexington Ave., 4th Floor, New York, NY 10168 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](