Page 306 - How to Make Money in Stocks Trilogy

S = Supply and Demand: Big Volume Demand at Key Points 183

generated by the oversized split as an opportunity to sell and take their
profits. In addition, large holders who are thinking of selling might figure it
will be easier to unload their 100,000 shares before a 3-for-1 split than to
sell 300,000 shares afterward. And smart short sellers pick on stocks that
are heavily owned by institutions and are starting to falter after huge price
run-ups.
A stock will often reach a price top around the second or third time it
splits. Our study of the biggest winners found that only 18% of them had
splits in the year preceding their great price advances. Qualcomm topped in
December 1999, just after its 4-for-1 stock split.

Look for Companies Buying Their Own Stock
in the Open Market

In most but not all cases, it’s usually a good sign when a company, especially
a small- to medium-sized growth company that meets the CAN SLIM crite-
ria, buys its own stock in the open market consistently over a period of time.
(A 10% buyback would be considered big.) This reduces the number of
shares and usually implies that the company expects improved sales and
earnings in the future.
As a result of the buyback, the company’s net income will be divided by a
smaller number of shares, thereby increasing earnings per share. And as
already noted, the percentage increase in earnings per share is one of the
principal driving forces behind outstanding stocks.
From the mid-1970s to the early 1980s, Tandy, Teledyne, and Metrome-
dia successfully repurchased their own stock, and all three achieved higher
EPS growth and spectacular stock gains. Charles Tandy once told me that
when the market went into a correction, and his stock was down, he would
go to the bank and borrow money to buy back his stock, then repay the loans
after the market recovered. Of course, this was also when his company was
reporting steady growth in earnings.
Tandy’s (split-adjusted) stock increased from $2.75 to $60 in 1983, Metro-
media’s soared from $30 in 1971 to $560 in 1977, and Teledyne zoomed
from $8 in 1971 to $190 in 1984. Teledyne used eight separate buybacks to
shrink its capitalization from 88 million shares to 15 million and increase its
earnings from $0.61 a share to nearly $20.
In 1989 and 1990, International Game Technology announced that it was
buying back 20% of its stock. By September 1993, IGT had advanced more
than 20 times. Another big winner, home builder NVR Inc., had large buy-
backs in 2001. All these were growth companies. I’m not sure that company
buybacks when earnings are not growing are all that sound.