Facebook Just Made This ‘Shareholder Friendly’ Move – But Does That Make it a Buy?

[Power Trends] Facebook Just Made This ‘Shareholder Friendly’ Move – But Does That Make it a Buy? Here’s something you don’t see often: A company’s share price jumps more than 20% in a single day – after reporting a drop in sales and profits. But that’s just what happened with Meta Platforms (META) – the social-media artist formerly known as Facebook. Meta reported its fourth-quarter results after the market close on Feb. 1, a report that included a 4% drop in revenue. And its share price shot up 23.3% the next day. A lot of stocks don’t do that in a year, much less a day. So, let’s get this straight. Meta’s earnings and profits fell, so investors aren’t going after the growth. And the company doesn’t pay a dividend, so investors aren’t going after the income. But in concert with its earnings report, Meta announced a very “shareholder friendly” move – one that bullishly targets its share price. And that’s the attraction. Let’s look at what Meta did, understand why the move was so bullish, and see how we can spot these events as they’re happening. Big and Bullish So what was this “shareholder friendly” move that put a charge into Meta’s stock? Very simple ... it’s a stock buyback. More specifically, a $40 billion stock buyback. Share buybacks are part of that satchel of magic strategies that investment pros characterize as “financial engineering.” And these strategies are almost always good for investors. And it certainly was with Meta: The stock hopped from $150 to $200 in early February, and half that jump has stuck, even as stocks generally stumbled. When a company buys back shares, it doesn’t hold them in an account like you or I would. It actually retires those shares into its internal “Treasury,” which reduces the number of shares available to investors – or “the float,” as it’s called. This is bullish for several reasons. The first is basic supply and demand. Share buybacks influence both. A company repurchasing its own stock, in effect, adds a motivated buyer to the mix. And that buying reduces the supply of shares available to all the other investors. More demand + less supply = higher prices. To see that this isn’t just Econ 101 theory, look at one of the key financial metrics all investors use – earnings per share (EPS). Think of EPS like a regular fraction, with a company's profits on the top (numerator) divided by the number of shares on the bottom (denominator). If a company earns $100 in profits and has 10 shares outstanding, you’re talking about a $10-a-share EPS number. Do a buyback of five shares, assume profits hold steady at that $100 figure, and you’re now talking about an EPS number of $20 a share. In other words, without the company doing anything to improve its business results, this bit of shareholder-friendly, financial-engineering magic has doubled its earnings per share. And (in our hypothetical example), if the company boosts earnings by 20%, to $120, the buyback means its EPS number has gone from $10 a share to $24. There’s more. A buyback is a signal that a company believes its shares are undervalued. No board members would approve the enormous amounts of money required to buy back tons of shares if they thought they were overpaying. We’re not talking chump change here. Meta authorized up to $40 billion to buy more shares – a significant investment by any measure, and especially after the company repurchased $27.9 billion of its shares last year. And perhaps most important of all, Meta is riding a much-bigger trend: Companies, in general, are spending record amounts to buy back their own stock. Buyback authorizations hit $1.2 trillion last year, and they are soaring again here in early 2023. In January, announced authorizations jumped over $130 billion, more than triple what we saw last year. Oil giant Chevron (CVX) announced a massive $75 billion authorization. And in a comment that really puts this all into context, Vicki Hollub, CEO of sector peer Occidental Petroleum (OXY), recently said share buybacks are more important to the company than boosting oil production. Semiconductor maker Skyworks Solutions (SWKS) authorized $2 billion – more than 11% of the company’s market value – to buy its own shares. And Apple (AAPL), the world’s most-valuable company, got there in part because it’s the buyback king. It most recently invested $19.5 billion in the last quarter. Spotting the Unusual Buys My Quantum Edge system identifies stocks with the strongest fundamentals and price action that are also are seeing unusually strong buying pressure. Stocks with these three factors have the highest probability of making you money. Analyzing fundamentals and price action are not new disciplines, though my particular way of doing it is unique. But the third piece of my system – spotting huge money inflows into specific stocks – is untapped territory for most investors. And it’s not that most folks ignore its importance. They just don’t know what to look for. The Big Money pros do all they can to keep their buying and selling quiet. But because my previous job as a professional matchmaker between institutional buyers and sellers embedded me deep into the process, I learned what they do and what to look for. When I developed my Quantum Edge system, I designed algorithms that turned me into a kind of investing Sherlock Holmes – able to use my magnifying glass to find the clues Big Money leaves behind. When I talk about Big Money buying, I’m referring to institutions and hedge funds that shell out millions or even billions to buy shares. Unusual buying can also be detected for other reasons, including acquisitions, rebalancing indexes, and – you guessed it – share buybacks. If we look at a price chart of Meta’s shares over the past 12 months, we primarily see big selling, shown by the red bars on the chart below. But we just recently detected unusual buying in META, which you can see by the green bars on the right. The two biggest buying days are the day immediately following the company’s buyback announcement and an even larger buying spike two trading days later. That one-day surge came on blockbuster volume – nearly five times the daily average. Much of that was investor reaction, but Meta could be a player in the mix and adding to the frenzy. We’ll find out more in the company’s next quarterly report, but we can see big buying going on right now. Does that mean Meta Platforms is a good buy? Going on the Big Money buy signals alone, I’d say no. You also have to incorporate the other factors in my system, so let’s take a look. META’s Quantum Score is 69, which is quite good. As a reminder, the Quantum Score is the single-number, at-a-glance snapshot of a company’s overall health – one that says immediately if a stock is worth considering. Drilling down further, Meta’s fundamentals rate a 70.9, and its technicals rate a 67.7. Those solid readings, combined with the recent Big Money buy signals, tell us the stock will likely move higher. That said, there are some yellow caution flags that give me pause. I am concerned about the declining sales, some still-high valuation metrics, and some less-than-ideal technicals. Right now, Meta Platforms is trading at roughly $170 a share. I can see the stock rallying back above $200 – and maybe higher – in the months to come. But, right now, I see stronger opportunities out there. I’m talking about companies with better Quantum Scores, more pristine readings in fundamentals and technicals, and unusual buying. Many of these are tech companies like Meta, but there are some sleepers as well in the discretionary and staples sectors. With a market that could pull back a bit after a hefty 10% start to the year, these are the stocks I am watching right now ... and will grab if this pullback becomes reality. Talk soon, [Jason Bodner]Jason Bodner Editor, Jason Bodner’s Power Trends [866.385.2076](tel:+866-385-2076) | support@tradesmith.com ©2023 TradeSmith, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of TradeSmith, LLC. This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as researchers and writers. Our work may contain errors and should not be considered personalized investment advice. 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