Ticker Reports for May 13th
Why These Companies Are Buying Back Stock Lately
When investors think about their potential winnings through the stock market, two methods typically get the lion’s share of attention. The most straightforward appreciation will happen through the classic buy low and sell high (with a little luck). Second, dividend income has become a common preference during high inflation.
Focusing on dividends, the primary method managements use to repay their shareholders, may not be the most effective way for investors to get their money back. In just a bit, it will become clear that share buybacks are a much better way for shareholders to feel the love, as they let investors compound their wealth more efficiently.
Apart from being superior in efficiency, share buybacks can send investors—and markets—a broader message. If insiders are buying back their own stock, wouldn’t it be logical that they think it’s cheap? Suddenly, stocks like AutoNation Inc. (NYSE: AN), eBay Inc. (NASDAQ: EBAY), and even Apple Inc. (NASDAQ: AAPL) may be on the cheaper end as management initiated aggressive buyback programs.
Buybacks Are the Real Life Hack
Because dividends are paid with a company’s free cash flow (operating cash flow minus capital expenditures), investors will receive their dividends through taxed money. Once investors receive these dividends, they must also pay their share of taxes.
Why go through double-taxation and take from the company’s cash balance when investors could pick the compounding route? When management buys back stock, they increase your ownership in the company as an investor, enabling you to compound your wealth faster.
Ideally, investors pick growing – and profitable – companies for their portfolios, so when management decides to buy back stock, they will own a larger piece of a growing pie. Of course, not all buybacks are made equal, as some companies trick investors by buying back stock by issuing debt, which is like paying your credit card with another credit card.
Three Companies Buying Back Stock Right Now
It could be said that, as the Federal Reserve (the Fed) prepares to cut interest rates later this year, management is getting ready to invest in AutoNation’s future, as cheaper vehicle financing could drive demand higher in the car market.
As the ISM services PMI index had its first contraction reading since 2020, the Fed may have another reason to bring on these cuts, and eBay management is right there to ride the recovery in the business services sector.
The stock market’s darling, Apple, is still the same cash cow as ever. Because of its predictable – and growing – free cash flow, management took a stance to ensure aggressive buybacks send investors a message: The stock is cheap!
1. AutoNation is Behind the Wheel
Based on price action, AutoNation is not cheap, as it trades at 90% of its 52-week high today. Following the future demand for vehicles in the U.S. market, investors are jumping on board with management’s $1 billion stock buyback program, looking to buy up to 14.9% of all shares.
Thinking along the same lines as management, analysts at Bank of America slapped a $215 price target on AutoNation stock, calling for a 31% upside from its current price.
According to the company’s financials, AutoNation generates up to 12% returns on invested capital (ROIC), so investors can rest assured that these buybacks aren’t a trick but are financed by steady profits.
2. eBay’s Bears Went Running
After realizing eBay’s management will buy up to $2 billion in stock, the company’s short interest declined by 6.4% in the past month in a show of bearish sentiment retreat. More than that, eBay stock rose to 96% of its 52-week high to let the bulls take over.
As stocks like Shopify Inc. (NYSE SHOP) popped on earnings, showing that the digitized economy is a new escape for businesses seeing their margins squeezed by the U.S. stagflation (low economic growth with high inflation), analysts at Barclays boosted eBay’s valuation to $65 a share, or 27.5% above today’s prices.
But that’s not all; the Vanguard Group saw fit to boost its stake in eBay by 7.7% as of May 2024, bringing its total investment up to $3.3 billion. Investors could say the company’s 13% ROIC was a sign of confidence.
3. Management Bites the Apple
A behemoth of a buyback program, Apple’s management set aside $110 billion to buy back stock. Far from a price action discount, Apple stock trades at 92% of its 52-week high despite facing some headwinds in its recent quarterly earnings announcement.
Investors know that Apple’s moat will likely get over this temporary bump in the road. Hence, those at Bank of America see a price target of up to $230 a share. Apple would have to pull off a 26% rally from today’s price to prove analysts right.
Generating up to 42% ROIC in the past 12 months, investors may apply the ‘buy and forget’ mentality here, as these profits are more than enough to let the company afford these buybacks and then some.
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GameStop is Roaring Based on Speculation Not Substance
GameStop Corp. (NYSE: GME) shareholders may have a feeling of deja vu. Trading of GME stock was paused due to a limit up limit down (LULD) pause on Monday, May 13. The 110% higher move fuels the idea that GameStop is ready to experience another short squeeze reminiscent of 2021.
But the GameStop stock price spike isn’t fueled by news that impacts the business. The company doesn’t report its first quarter earnings until June 5, 2024. The “news” is that Keith Gill (aka Roaring Kitty) took to X this weekend for the first time in nearly three years.
It was Gill who helped make GameStop one of the original meme stocks in 2021. The idea was to target short sellers, specifically Melvin Capital and force them to cover their short positions. This would drive up the price of the target stocks, creating a short squeeze.
Well, guess what? Short interest in GME stock is over 21% of the float. That’s drawing the attention of the meme stock crowd, who may be trying to catch lightning in a bottle again.
There’s Still No “There” There
There are two stories surrounding GameStop. One is coming from a determined group of traders who are intent on “sticking it to the hedge funds” that are shorting GME stock.
The other story is from those hedge funds and analysts who correctly note that the underlying fundamentals of GameStop remain underwhelming. In the company’s most recent quarter, the company missed on both the top and bottom lines.
At that time, the company reported an unspecified number of layoffs as it continues to face competition in its e-commerce business.
The bottom line is that GameStop’s legacy business is irrelevant to the needs of today’s gaming community. In fact, the company’s business model now focuses on allowing its chief executive officer (CEO) and chairman, Ryan Cohen, to buy and sell cryptocurrencies and other blockchain-related stocks.
Chase GME Stock at Your Own Risk
The GameStop analyst ratings on MarketBeat show that only Wedbush has weighed in on GME stock, and their Strong Sell rating should not inspire confidence. Remember that analysts rarely issue a Sell rating, let alone a Strong Sell rating.
It would be foolish to predict what will happen next with GME stock. All the fuel is there for another short squeeze. But before you get involved, remember that a short squeeze is the definition of the “greater fool theory.” That is, the price will keep going up as long as you can find one more buyer who’s willing to pay a higher price than you.
Also, what goes up can go down and often just as fast. That’s what many GME investors found out the hard way in 2021. That wasn’t all the fault of Robinhood Markets Inc. (NASDAQ: HOOD), which prevented investors from selling their stock when the inevitable downturn began.
If you’re going to take a spin on this roulette wheel, you need to understand that this surge is being fueled by fantasy, not fundamentals. That doesn’t mean you can’t make real money. But you need to have an exit plan in place and take your profits when you get them.
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3 Hot Stock Upgrades That Should Be on Your Radar
Analysts' sentiment is a powerful force in the market that can make the difference between winning and losing a trade. The stocks on this list are among the Most Upgraded Stocks tracked by Marketbeat and have bullish support from analysts. They also have secular tailwinds to support their business growth, suggesting analysts' support will remain firm this year and continue to lead their markets higher. The takeaway for investors is that Domino’s Pizza (NYSE: DPZ), Target (NYSE: TGT), and Texas Roadhouse (NASDAQ: TXRH) can all set new highs this year while paying solid dividends.
Domino’s Pizza Rally has Legs
Domino’s is not a new name on the list of Most Upgraded Stocks, but it is creeping up the rankings, entering the top ten in Q2 2024. Marketbeat.com tracks twenty-six positive revisions from twenty-six analysts, a favorable ratio for investors, with many coming out after the Q1 release. The consensus target aligns with the current price action, suggesting the stock is fairly valued; however, the consensus is up 45% YOY, 25% since last quarter, and 13% in the last months, leading the market to new highs. The freshest targets have the market trading near $590, which is 15% above the consensus target.
A move by the DPZ market to the consensus target would set a new all-time high. In this scenario, the market will cross a significant pivot point after a multi-year consolidation that could lead it up by $300 or more. The bull case target is $880; the stock price will get there on steady growth, solid margin, and a healthy capital return.
The dividend yield is smallish at 1.20% but due to a higher-than-average valuation. The stock trades above 30X this year’s earnings but is expected to grow the bottom line over the next five years. Valuation falls to 28X relative to next year’s outlook and below 25X within the next three. Until then, the distribution is less than 35% of this year’s earnings, growing at a double-digit CAGR. Domino’s also repurchases and retires shares, reducing the count by an average of 1.5% at the end of Q1.
Target Well-Liked Ahead of Q1 Earnings
Since the last report, Target slipped to #7 on the Most Upgraded list but is still a significant opportunity for investors. The factor most affecting the slip is Target’s late-season report. It is slated to issue its Q1 results in two weeks and will likely catalyze another round of analyst revisions.
The revisions to date are positive; Marketbeat.com tracks twenty-seven revisions, including three upgrades since March, and they are leading the market to new highs. The $180 consensus target implies a 12% upside from $160, with most fresh targets above it. The freshest targets have this stock trading near $190 to $200 and a multi-year high. A move to that level would confirm a complete reversal in this market and open the door to a sustained rally.
The analysts are not expecting much from Target, so revenue outperformance should be expected relative to the consensus of $24.5 billion or down 3% YOY. Seventeen of twenty-three revenue/earnings estimates were lowered since the last report, setting the bar low. The critical details will be the margin and the growth outlook, which is expected to return by year’s end.
Texas Roadhouse Sizzles: Stock Hits New Highs
Texas Roadhouse’s Q1 results were mixed relative to the analysts’ consensus forecasts but solid enough to issue thirteen revisions, twenty-eight since the Q4 release, lifting the consensus price target by 15% in a few days. The consensus target assumes a 7% decline but is led higher; the freshest targets have this stock trading at $170 to $180, flat to up 6% from current levels. Because the discretionary company delivers solid cash flow, pays a healthy dividend, and is expected to accelerate growth this year, investors may expect the revision trend to continue. Regardless, the technical action suggests this rally still has legs and may rise another 10% to 15% before topping out.
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