Posted May 10, 2022
By Zach Scheidt
These (Not-So-Secret) Stock Buyers Can Rescue the Market
After weeks of trading lower, the market desperately needs buyers.
Individual investors have been panicking and unloading their shares. Hedge funds have been setting up short positions. And even institutional money managers are now getting scared.
With too many sellers and no one willing to step up and buy shares, stock prices will continue to move lower.
But there is one group of buyers with the power to stop this slide. Today, these buyers are putting billions of dollars to work in the stock market.
I'll show you proof in just a moment. And I'll also show you some of my favorite stocks that will benefit from these huge investors.
These Buyers Aren't Scared of Lower Prices
With stocks under so much pressure, who could possibly be excited about buying shares in this environment?
I'll tell you who... Big tech companies that use their profits to buy back shares!
You've probably heard me talk about share buybacks before. And frankly, I've got mixed feelings about the process.
Large profitable companies often use their cash to buy back (or repurchase) shares of their stock.
This is something that companies have been doing since long before I started my career. And it can be a great way for companies to return value to shareholders like you and me!
When a company repurchases shares of stock, it uses cash from profits to buy shares in the open market — just like how you or I would buy shares for our investment accounts.
Except instead of hanging on to these shares, companies retire them. In other words, they buy the shares and then erase them entirely from existence.
Why do that?
Because then a company retires its shares, it means the remaining shareholders now own a larger percentage of the company.
It's sort of like the opposite of a stock split. Each remaining share now becomes more valuable because it represents a bigger piece of the overall company.
See what I mean about adding value for shareholders? And here's the kicker...
When stock prices are lower, a company can use the same amount of money to buy back even more shares of stock.
So these companies are happy to take advantage of lower prices and retire more shares for their investors.
Let's think about how this affects today's market slide.
Buybacks Support Stock Prices — Especially Now!
We're working our way through earnings season. And at this point, many of the biggest companies have already reported quarterly profits.
Along with those earnings reports, profitable blue-chip tech companies have been announcing new buyback plans for their stock.
And as these plans are put to work, the market is going to get some much-needed buying pressure to help support many of the biggest and most important stocks.
Here's what you need to know about the timing of these buybacks…
Most companies have a "blackout period" from two weeks before the end of the quarter until two days after a company's earnings report.
During this period, the companies can't buy back shares. After all, it wouldn't be fair for the company to buy when it has so much information that hasn't been made public yet.
That's part of the reason shares of tech stocks — even the profitable ones with great businesses — have been trading lower. Their buyback plans have been temporarily halted.
But now that earnings reports are being released, big tech companies are once again starting to ramp up buybacks. And some are boosting their buyback programs in a big way!
For instance, Apple recently announced a $90 billion increase to its current share repurchase program.
Earlier this year, Cisco Systems announced a $15 billion increase to its buyback program.
And even old-school companies like Exxon Mobile are using cash from their businesses to buy back billions of dollars worth of stock.
Keep in mind, these announcements are in addition to the ongoing repurchase programs that are already in place for large profitable companies in today's market.
So as big companies come out of their quiet periods and start to repurchase shares, watch for the market to stabilize a bit.
Of course, this is just another great reason to invest in companies that have reliable profits, trade for reasonable prices, and also have share buyback programs!
Here's to living a Rich Retirement!
Editor, Rich Retirement Letter