Tuesday, November 13, 2012

Paper: "Market underreaction to open market share repurchases"

This is a classic paper about share repurchases,

"We examine long-run firm performance following open market share repurchase announcements which occurred during the period 1980 to 1990. We find that the average abnormal four-year buy-and-hold return measured after the initial announcement is 12.1 percent. For 'value' stocks, companies more likely to be repurchasing shares because of undervaluation, the average abnormal return is 45.3 percent. For repurchases announced by 'glamour' stocks where undervaluation is less likely to be an important motive, no positive drift in abnormal returns is observed. Thus, at least with respect to value stocks, the market errs in its initial response and appears to ignore much of the information conveyed through repurchase announcements."
There's also a paper showing the converse - called the "new issues puzzle" - that companies issuing stock in secondary offerings significantly underperform relative to nonissuing firms for years after the issuance of equity.

This is empirical validation of our long CNRD, short GMXR trade! Conrad is a huge repurchaser of shares. GMX Resources just sold a huge stake in the company for way below the market price.

Someone should create an ETF owning U.S. equities (S&P 500, Russell 2000, etc) with low volatility (to take advantage of that anomaly) that are returning the most capital to shareholders, whether through repurchasing shares or paying dividends. 


WSM said...


CP said...

Perfect, thanks.

It looks like that ETF is market cap weighted?

What if instead the stocks were scored based on P/TBV and P/FCF and weighted that way?

Would also be good if volatility was part of the model as well, to take advantage of what we know about that anomaly.

CP said...

Almost ten years ago.

The ETF you suggested (PKW, Invesco BuyBack Achievers ETF) compounded at 14% versus 15.4% for S&P 500.

I'm surprised it under-performed the index.


Interesting to see that it is currently 31% financials.


CP said...

The Invesco S&P 500® High Dividend Low Volatility ETF (Fund) is based on the S&P 500 Low Volatility High Dividend Index (Index). The Fund will invest at least 90% of its total assets in common stocks that comprise the Index. Standard & Poor's® compiles, maintains and calculates the Index, which is composed of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. The Fund and the Index are rebalanced and reconstituted semi-annually, in January and July.

This ETF (SPHD) has been around since October 2012. Surprisingly, it has lagged the S&P index by 230 bps annually.

Top holdings:

WMB Williams Cos Inc/The 3.39
KMI Kinder Morgan Inc 2.99
CVX Chevron Corp 2.94
MO Altria Group Inc 2.92
IBM International Business Machines Corp 2.86
PM Philip Morris International Inc 2.80
PPL PPL Corp 2.64
VZ Verizon Communications Inc 2.50
PNW Pinnacle West Capital Corp 2.46
KHC Kraft Heinz Co/The 2.43