Fried's Buyback Favorites

11/08/2002 12:00 am EST

Focus:

David Fried

Editor, The Buyback Letter

The Buyback Letter is the only newsletter to focus exclusively on companies buying back their shares. Editor David Fried takes a sound, common sense approach to long-term investing, based on the belief that “When companies buy back their own stock, it’s an enormous vote of confidence by those who know it best.” He has only closed out 26 positions in his Stock-Pickers Portfolio since it began in 1996. Of these, 23 were profitable, with an average profit of 165%. 

“Are some buybacks better than others? Is there specific criteria you use when selecting buyback candidates? Buybacks often get criticized because the share count doesn’t go down. For example, a company may buy back shares, but actually increase the number of shares outstanding. Microsoft is a good example of this over the past few years. They have bought back what they could to offset dilution. I look for buybacks that actually reduce the number of shares outstanding. That’s the difference in my mind between the buybacks that work and the ones that don’t work. We avoid the stocks where they announce buybacks but then issue more than they reduce or don’t follow through on the buyback announcement. We focus on the ones that actually do reduce their outstanding share amount, as well as those companies that have shown to be astute buyers of their own stock.

“I believe in diversification, which makes it difficult to select a single favorite. We have a 20 stock portfolio in our Buyback Letter. Since we introduced it, the S&P is up about 32% and the portfolio is up about 160%. One company that we have an eye on now, which seems well-priced is SkyWest (SKYW NASDAQ). The way that stock acts in the next 12 months will be partially dependent on politics and travel and if people are fearful of another terrorist attack. But over time, we think the stock is an easy double from here. 

“Another company, which we’ve had in our portfolio for a long time, is OfficeMax (OMX NYSE), which is one of the big box retailers that has been really downtrodden. For a long time, it has been considered a weak sister to Staples and Office Depot. However, they have taken the last few years and invested in superior technology and superior re-stocking ability to their competitors and this is going to greatly enhance their profitability over the next few years. They spent a few years investing in this and we will now see the benefits. Don’t bet the house on any one stock, but these are two situations we like.”

Editor's Note:  All excerpts from the Forbes editors in this issue of The Money Show Digest are from a panel discussion held at The New York Money Show on Friday, October 25th.  Quoted stock performance, portfolio performance, etc., have not been updated to reflect changes in the market since that date.

For information on the Forbes group of newsletters, visit www.forbes.com/newsletters.

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