Heading into the Q1 2019 earnings season – which officially kicks off on Friday when JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) release their numbers – investors were concerned that the share buyback blackout period was going to help kick off a round of selling, like it did in early October 2018.
Oftentimes, during the three to four weeks before a company releases its earnings – the blackout period – companies will pause any share buyback programs they have implemented to avoid being accused of trading on insider information. The management team figures that, if they have to stop trading because of the inside information they have, the company probably should too. For companies that are buying back large percentages of their stock, this pause on purchasing during the blackout period can have a dramatic impact on their share values as demand for their stock decreases.
Mercifully, this concern never materialized in the run-up to the Q1 2019 earnings season. It seems that investors decided to be patient and not sell off their holdings during the blackout period in the belief that these companies will resume buying as soon as they can. Based on the 2019 stock performance of these companies that are buying back massive amounts of stock, this seems like a pretty safe bet.
To see how well these stocks have been doing, look no further than the NASDAQ US Buyback Achievers Index (^DRB). The DRB is an index that tracks U.S.-based stocks that have reduced their shares outstanding – primarily through corporate buyback programs – by at least 5% during the past 12 months. Some of the index's top holdings include Cisco Systems, Inc. (CSCO), Apple Inc. (AAPL), Oracle Corporation (ORCL) and Starbucks Corporation (SBUX).
Looking at the chart of the DRB below, you can see that – unlike the S&P 500 – the Buyback Achievers Index climbed to a new 52-week intra-day high of 14,281.53 today. This is higher than the high of 14,268.43 it hit on Sept. 21, 2018, when the S&P 500 topped out at its all-time high.
Much of this bullishness stems from the fact that companies – even those that aren't experiencing organic earnings growth – often increase their earnings per share (EPS) by buying back their shares because there are fewer shares among which the company's current earnings need to be divided. Regardless of how the EPS increases are achieved, investors love EPS growth.
The S&P 500 had another ho-hum day today as investors expressed their utter lack of surprise that European Union leaders and U.K. Prime Minister Theresa May were able to come to an agreement that kicks the "Brexit" day of reckoning down the road an additional six months to Oct. 31.
The index remained in the same tight consolidation range between support at 2,865 and resistance at 2,896 that it has been languishing in for the past seven trading days. However, with earnings season ready to begin, don't expect this consolidation range to hold much longer.
Risk Indicators – NASDAQ-100 Technology Sector
The NASDAQ-100 Technology Sector Index (^NDXT) is an equal-weighted index that tracks the members of the NASDAQ-100 Index that fall into the technology sector, and it is soaring higher and higher as the year goes on. In fact, after having only experienced a few minor pullbacks during the first quarter of 2019, the NDXT reached a new intra-day high of 4,742.66 today.
The index is being driven higher by the stellar performance of some of its top holdings – like Cadence Design Systems, Inc. (CDNS), Intuit Inc. (INTU), Adobe Inc. (ADBE) and Lam Research Corporation (LRCX). These tech companies are thriving because they fit in the current sweet spot of the global economy: technology investments.
As big data, online shopping and artificial intelligence grow in importance, so does the technological framework upon which these industries run. This means governments, corporations and individuals are all increasing their technology spending – pushing both revenues and earnings for tech companies through the roof. If the current uptrend is any indication of what the future holds, don't look for a slowdown any time soon.
Bottom Line – Winners Keep on Winning
I'm not surprised to see the stocks of companies with large share buyback programs and technology companies doing as well as they are because they have been Wall Street darlings for years now.
Newton's first law of motion states that an object in motion tends to stay in motion unless acted upon by another force. This concept holds true in the stock market as well. Stocks that have done well tend to continue doing well until acted upon by another force – like a negative earnings announcement, a pessimistic economic announcement or a geopolitical crisis.
Unless the Q1 2019 earnings season turns out to be a huge disappointment, watch for buyback leaders and tech stocks to continue outperforming.
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