`Buy the Dip' Has Apple and Biogen Stocking Up, Goldman Says

(Bloomberg) -- As global investors try to decide if Italy’s political drama is the next financial crisis or just another manic Tuesday, one big buyer is almost certainly at work beneath the surface of the American stock market.

It is, of course, companies, which are in the process of making good on the most generous share repurchases ever authorized. Trying to figure out which are the likeliest to be active? New research provides hints.

Apple and Biogen are among firms that have shown a tendency in the past five years to wait for their stocks to fall before buying them, according to a study by strategists Jessica Binder-Graham and Christopher Wolf of Goldman Sachs.

To trace the trend, Goldman looked at how closely buybacks at companies mimicked stock movements. It made a list of those where the correlations were negative 30 percent or greater.

It isn’t quite proof of an explicit strategy by the companies to buy the dip, but the data may help investors identify potential winners during times of market stress. The propensity to step in and buy on weakness is seen as a vote of confidence in their stocks.

Such companies “can be described as ‘value investors’ given a track record of taking a more tactical approach to repurchases,” the strategists wrote in a note to clients.

Broadly, corporate buybacks appear to follow a pattern of buying high. A notable example is the record repurchases at the bull market peak in 2007. The ebb and flow may have more to do with the business cycle -- buybacks rise after years of booming profits and fall after recessions such as 2009. Yet the sheer size, estimated at a new record of $650 billion this year by Goldman, raises questions on their efficacy.

As Goldman found out, some companies, intentionally or not, are doing better than others in capturing returns.

Using a framework from Fortuna Advisors, Goldman strategists developed a model to assess the effectiveness of each company’s repurchases. In the study, a return is calculated based on the actual schedule of a company’s purchases and the amount of money spent over the past five years. Then, it’s compared to a “straight line’’ return under a scenario when all these buybacks are evenly spread out during each quarters.

The difference is what Goldman calls the “buyback capture”. The bigger the capture, the more effective a company’s buybacks. Best Buy and E*Trade are among companies showing the highest buyback capture.

“They have created additional value above what they could have done by investing evenly,” the strategists wrote.

Below is a list of companies that have shown better buyback capture or price consciousness.

  • Top 10 with price consciousness
    • Fortune Brands Home & Security
    • Everest Re
    • Intuitive Surgical
    • CarMax
    • Edwards Lifesciences
    • Biogen
    • Avery Dennison
    • Chipotle
    • Starbucks
    • Apple
  • Top 10 with high buyback capture:
    • Best Buy
    • E*Trade
    • Applies Materials
    • SBA Communications
    • Quanta Services
    • Michael Kors
    • MSCI
    • Regional Financial
    • T. Rowe Price
    • McKesson

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