Breaking the $1 trillion barrier in market capitalization won headlines for Apple Inc. (AAPL), but Goldman Sachs says that a far more significant number for investors is the $1 trillion in share repurchases, also called stock buybacks, that U.S. corporations are likely to announce this year. This would be a 46% increase from 2017. Companies in the technology sector have been leading the way, accounting for 40% of authorized spending on buybacks so far in 2018, per Goldman's most recent U.S. Weekly Kickstart report. The six tech stocks with the biggest buyback yields, or ratios of buyback outlays to market cap, are Juniper Networks Inc. (JNPR), Citrix Systems Inc. (CTXS), Corning Inc. (GLW), Hewlett Packard Enterprise Co. (HPE), eBay Inc. (EBAY) and Lam Research Corp. (LRCX).
The significance of spending on share repurchases is that it boosts share prices by simultaneously increasing demand and reducing supply. Moreover, as Goldman notes, for a number of years buybacks have been the leading source of demand for shares. They add that August historically is the most active month for buybacks, accounting for 13% of outlays in the average year. (For more, see also: 3 Tech Stocks Nearing a Breakout.)
Top 10 Tech Company Buyback Yields
|Hewlett Packard Enterprise||9.4%|
|NetApp Inc. (NTAP)||7.4%|
|VeriSign Inc. (VRSN)||6.8%|
|F5 Networks Inc. (FFIV)||6.6%|
|HP Inc. (HPQ)||6.5%|
Source: Goldman Sachs; based on trailing 12 month data through August 2.
The median buyback yield in Goldman's Buyback basket of 50 stocks is 7.8%, while the median for the entire S&P 500 Index (SPX) is 1.9%. Regarding tech companies, while they have accounted for 40% of year-to-date (YTD) repurchase authorizations, they represent only 21% of YTD executions, or actual outlays. Goldman sees a positive in this data: "By extension, significant potential demand remains for Tech shares as firms look to complete their existing programs."
Not Dangerously Overcrowded
Based on their analysis of large cap mutual fund portfolios worth about $2 trillion, Goldman finds that "Tech is less of a 'crowded trade' than many investors believe." While these funds are about 217 basis points (bp) overweight in tech stocks relative to their respective benchmarks, and that this is the largest overweight tilt among all 11 S&P 500 sectors, this is the lowest overweight tilt to tech during the past two years.
Similarly, Goldman's analysis of hedge fund portfolios worth $2.3 billion finds a 25% net exposure to tech, 84 basis points higher than tech's share of the Russell 3000 Index, but also a lower overweight tilt than in 2016 and 2017. Lastly, Goldman finds that their own hedge fund clients have a 26% net exposure to tech stocks. The information technology sector represented 26% of the market cap of the S&P 500 as of August 3, per Fidelity Investments.
Bullish on Tech
In fact, Goldman is bullish on tech stocks, based on two fundamental factors. In the previous edition of the U.S. Weekly Kickstart report they wrote that "Although tech sector valuations stand near cycle highs, they remain low relative to long-term history." They added that earnings growth remains strong in tech. They also observed that, while a relative handful of big tech stocks have driven much of the S&P 500's gains so far in 2018, market breadth is not at those extremely narrow levels "that have historically been warning signs." (For more, see also: The Bullish Case For Tech Stocks: Goldman.)