While they are a usually controversial subject, stock buybacks have nonetheless made a huge impact this year. According to a CNBC report last month, companies will likely purchase $1 trillion worth of their own equity. Understandably, this trend has Wall Street considering the pros and cons.
Primarily, most large companies engage in stock buybacks for financial efficiency’s sake. Once an organization has either dominated its industry or the key market has become saturated, management has little reason to hold onto excess equity capital. Buying back shares is an effective means to put money to better use.
But as our own Will Ashworth explained, stock buybacks are open to misuse. Executives often use their companies’ buyback announcements to cash out themselves. As Securities and Exchange Commissioner Robert Jackson Jr. explained, “So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.”
Moreover, not all stock buybacks are equal. If an organization decides to borrow money to repurchase its equity, it could negatively impact its balance sheet. Cash is king, especially if the economy falls into a recession. Thus, buybacks don’t necessarily translate into stocks to buy.
The controversy regarding this issue will only accelerate over the next several months. Relations between the U.S. and China shown no signs of improving. While we’ve been insulated so far, this protection may not last.
At the same time, stock buybacks should have a net bullish effect, especially for well-capitalized organizations. Here are the seven best stocks to buy with large buyback programs:
Oracle (NYSE:ORCL) is a company that has tested investor patience. Although ORCL is a renowned name among database-management providers, it has lagged competitors like Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) in the cloud.
Oracle’s latest earnings report for its fiscal first quarter didn’t really help matters. ORCL beat earnings per share estimates, but slipped slightly against consensus revenue targets. Management also gave lackluster guidance.
But despite the less-than-stellar news, ORCL stock rebounded quite well, relatively speaking. On a year-to-date basis, shares are up nearly 8%. A week ago, Oracle announced $12 billion for its share buyback program. If anything, this signals that management has confidence in their ability to grow earnings consistently.
I also like the fact that Oracle is a focused company. Sure, it has challenges, but at least they can focus on their core business, and not on disparate divisions. Further, ORCL caters to big-name organizations due to its indelible brand name and reputation.
Rockwell Automation (ROK)
If you want exposure to the automation revolution, consider adding Rockwell Automation (NYSE:ROK) to your stocks to buy list. ROK specializes in smart manufacturing, but has several other business divisions, such as control systems, industrial components and custom-designed platforms.
Another reason to seriously look into ROK shares is its buyback program. On Sept. 6, Rockwell announced a $1 billion share repatriation, which is one of the most sizable buybacks this year.
I’m comfortable with the news largely because of the company’s financial stability. ROK is sitting on nearly $1.5 billion in cash. The automation firm also demonstrates consistently-strong free cash flow. If that wasn’t enough, Rockwell is a leader in an industry that is likely to continue growing.
You just have to look at its recent market performance. While the first half was forgettable, ROK stock has gained 20% in the second half.
Chances are, if you talk with your professional colleagues, most of them will badmouth President Donald Trump’s China tariffs. That’s because we live in a global economy which doesn’t necessarily reward anachronistic nationalism. But one sector that benefits handsomely from this new paradigm is steel.
While not a perfect idea, perhaps it’s time to consider adding Nucor (NYSE:NUE) to your stocks to buy list. For starters, NUE is the definitive “Trump stock.” Nucor is a proud American institution that hires Americans, with the odd Canadian or two thrown in the mix.
Management announced stock buybacks to the tune of $2 billion on Sept. 6, which makes sense for them. While recent growth has impressed, the steel industry in general is a matured one. However, NUE generates consistently-positive earnings, and that trend should continue.
Therefore, Nucor’s buybacks are a great way to put their excess capital to work.
Steel Dynamics (STLD)
Source: Dayne Topkin Via Unsplash
Profitable investing often involves recognizing the market’s pulse. No matter how great your thesis is, if the masses don’t recognize it, you’re probably not going anywhere. This is the way I feel about Steel Dynamics (NASDAQ:STLD). Steel isn’t our future, but for now, it’s one of the viable places to park your money.
Any doubts that political pundits had regarding the president’s resolve in pushing the “America First” message just dissolved. To ensure a level playing field, and to protect our intellectual-property rights, Trump is doing the unthinkable. He’s playing hardball with the Chinese, knowing full well (or at least I think he does) that it’s also going to hurt us.
That level of commitment should encourage STLD investors. Another booster is the company’s recently announced additional stock buybacks in the amount of $750 million.
As with Nucor, the move makes perfect sense for STLD stock. The steel firm generates comparatively strong earnings, so the buyback program allows management to utilize money efficiently. A bonus is that the company has significantly ramped up quarterly revenues.
As I previously mentioned, share buyback programs tend to be controversial. Including Nordstrom (NYSE:JWN) on this stocks to buy list will at least generate significant debate. Due to its retailer status, JWN invariably carries baggage. But for those who are more risk-tolerant, Nordstrom has upside potential.
One of the biggest takeaways from the department store recently is that their offseason Nordstrom Rack could end up being their top money-maker. A significant factor to Rack’s success is that it doesn’t give off cheap vibes. This is something that I can’t say about Macy’s (NYSE:M) foray into discount outlets.
Additionally, Nordstrom’s ability to focus and execute has paid off significantly this year. Since the beginning of January, JWN stock has gained over 26%. While I expect shares to pull back some, when they do, it’s a buying opportunity.
On Aug. 22, JWN announced a $1.5 billion buyback program. The move doesn’t concern me like other buybacks. JWN sits on over $1.3 billion in cash, and has consistently-positive FCF.
Thermo Fisher Scientific (TMO)
Sometimes an industry is so big and relevant that you can overlook some individual weaknesses. That’s why Thermo Fisher Scientific (NYSE:TMO) ranks among the best stocks to buy with large buyback programs. A biotechnology firm, TMO specializes in precision laboratory equipment, and genetic-testing tools.
If you think about it, Thermo Fisher stands on an almost unassailable position. The biotech sector will never stop searching for the next big therapy. Of course, not all contenders are successful. But TMO doesn’t have to be: they provide the equipment necessary for other companies to do their work.
Therefore, it’s no surprise that TMO has done exceedingly well in the markets. Year-to-date, shares are up nearly 28%. Furthermore, on Sept. 7, TMO announced a $2 billion buyback. I must say, I’m not a big fan of Thermo Fisher’s debt levels. However, it generates substantial free cash flow and consistently rising earnings.
Given its standing in the biotech space, I expect continued robustness in TMO’s financials.
Analog Devices (ADI)
Analog Devices (NASDAQ:ADI) is another organization whose strengths far outweigh any less-than-spectacular metrics. A semiconductor specializing in data conversion and signal processing, ADI is directly involved in several lucrative markets, including automation, health care, and artificial intelligence. As their website states, they represent the bridge between the physical and digital world.
Although their trading pattern has been incredibly choppy this year, the markets have generally responded positively to management’s strategies. On a YTD basis, ADI stock is up 7.5%. The company also pays out a 2% dividend yield, making the overall returns more attractive.
On Aug. 21, ADI announced an additional $2 billion to their share buyback program. While it’s a huge figure, investors should note that the company has experienced a significant boost in sales. This is also reflected in significantly higher earnings. Finally, ADI enjoys strong and reliable FCF.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.