A share buyback is one of the most popular options available to executives when deciding how to reinvest some their company’s profit back into the business. In most cases, when a management team decides to buys its own shares on the open market it's a signal to investors that they believe the shares to be undervalued. Many value investors look to invest in these types of companies because they tend to be very well capitalized and generate large amounts of free cash flow. (For a quick refresher, see: A Breakdown Of Stock Buybacks)

One of the most commonly traded exchange traded funds for gaining exposure to share buybacks is the PowerShares Buyback Achievers Portfolio ETF (PKW). For those you don’t closely follow this fund, the sector breakdown is quite diverse as shown in the chart below.



You’ll notice that the ETF has a relatively heavy weighting toward consumer discretionary and information technology. As noted in recent articles, most active traders would be pleased to see the higher-than-average weighting to those sectors because they represent the best performing sectors so far this year. The fund also trades at a respectable P/E ratio of 15.75 and has a total of 176 holdings. With a reasonable total expense ratio of 0.71%, traders are gaining exposure to some top-quality names in an extremely promising segment of the market.

From a technical perspective, PKW is trading within an extremely strong long-term uptrend and is currently trading near all-time highs. Based on the chart, there is essentially no overhead resistance and the increased volume suggests that the momentum could just be starting to build. Taking a look at several of the common indicators such as the Relative Strength Index, the recent move above 70 suggests that the run is starting to become overbought, but it appears as though it still has room to the upside. Traders will want to watch for this indicator to cross below 70 before heading to the exit.



Looking at Top Holdings for Clues

 When looking for solid investment ideas, it is often a good idea to check the top holdings of several of your favorite ETFs. In the case of PKW, a few key holdings that may be worth a closer look include:

Company

Weighting (as of 06/06/14)

Home Depot Inc. (HD)

4.98%

Oracle Corp. (ORCL)

5.09%

Discover Financial Services (DFS)

1.71%

Pfizer Inc. (PFE)

4.48%

AT&T (T)

4.88%

 

Taking a look at Home Depot's chart, its stock is currently trading near the top of a defined channel pattern. The nearby resistance of $82 has prevented the price from heading higher in the past and it will be interesting to see if the company’s buyback plan will be enough of a catalyst to break the price higher. 



Another key holding of PKW that looks positioned to make a move higher is AT&T. Notice how the stock has recently found support near $34 (dotted line). This level in combination with the 200-day moving average (red line) will be used by the bulls to set up a defined risk/reward setup. It wouldn’t be surprising to see the bulls set their stop-loss orders directly below the 200-day moving average and then wait to see if its 300 million share buyback program – worth just under $11 billion – will be enough of a catalyst to send the price higher. Other technical points of interest are the bullish crossovers on the MACD and fast stochastic indicators. These technical buy-signs suggest that the recent bounce off the nearby support could continue and a move toward the recent swing high of $36.46 could be in the cards.



The Bottom Line

Companies that undergo share buyback programs are of particular interest to fundamental investors because it suggests the stock is trading at an attractive valuation. Incorporating an ETF such as the PowerShares Buyback Achievers Portfolio ETF is an easy way to gain exposure to this group of companies. For those who would prefer to focus on individual stocks, an idea worth considering is taking a look at the top holdings in the buyback funds mentioned in this article. (For more on this topic, see: Impact of Share Repurchases)

 


Tickers in this Article: PKW, HD, DFS, PFE

comments powered by Disqus
Trading Center