Tag Archives: stocks

The Fundamental Difference: Through A Lens Of Net Buybacks

By Jeremy Schwartz At WisdomTree, we believe that screening and weighting equity markets based on fundamentals such as dividends or earnings can potentially help produce higher total and risk-adjusted returns over a complete market cycle. One of the most important elements of a fundamental index is the annual rebalance process, where the index screens the eligible universe and then weights those securities based on their fundamentals. In essence, the process takes a detailed look at the relationship between the underlying fundamentals and price performance and tilts weight to lower-priced segments of the market. One way to illustrate the benefits of this approach for our earnings-weighted family is to compare the net buyback yield of the WisdomTree Earnings Index to a market cap-weighted peer universe. Below we look at how the net buyback yield changes when you screen and weight U.S. equity markets by firms’ profitability instead of market cap. Earnings Weighting vs. Market Cap Weighting Click to enlarge The WisdomTree Earnings Index consistently had a higher net buyback ratio than did a market cap-weighted universe consisting of the 3,000 largest securities by market cap. The WisdomTree Earnings Index averaged a net buyback yield of 2.2% over the period, compared to just 1.1% for the market cap peer universe. We believe that having an annual profitability screen for inclusion in the WisdomTree Earnings Index helps avoid speculative and unprofitable smaller-capitalization firms that have a tendency to raise capital by periodically issuing new shares. The earnings-weighted approach that tilts weight to more profitable firms can also be a reason the weighted average net buyback yield is higher. The chart below looks at the net buyback yield on a universe of the lowest price-to-earnings (P/E) ratio stocks within the 3,000 largest stocks by market cap and contrasts that with the net buyback yield on the highest P/E ratio stocks. Net Buyback Yield by P/E Ratio Click to enlarge If corporate America responds well to incentives, the higher-priced basket would issue more shares (given that their stocks are high priced and issuing more of them would be an effective way to raise growth capital) and the lower-priced basket would issue fewer shares or actually buy back shares to reduce their shares outstanding and thus power their earnings-per-share growth. What we see in the data is the higher-priced universe buys back fewer share, and instead issues more shares (having more companies with negative net buyback yields). Why Earnings Weight Going back to the WisdomTree Earnings Index in the first chart-weighting by Earnings Stream is essentially tilting weight from a market cap-weighted scheme to over-weight those companies with below average P/E ratios and to under-weight those companies with high P/E ratios. The Earnings Stream can be defined as earnings per share times shares outstanding or market cap x earnings yield (which is equivalent to 1/PE ratio). Tilting weight to the higher-earnings-yield stocks by earnings weighting thus is one effective way to tilt the net buyback yield balance in one’s favor. Companies reducing shares outstanding are essentially locking in earnings-per-share growth by reducing their share count, while companies that are issuing more shares are creating a higher hurdle to overcome to achieve earnings-per-share growth. There is a philosophical debate about the motivations for all the buybacks we are seeing today as well as fears that companies are failing to reinvest for future growth (or that they just see no growth opportunities, hence all the dividends and buybacks). One thing is clear to us from the data: the lower-priced stocks issue fewer shares, and the more expensive stocks issue more shares (and have lower net buyback yields). This can be especially true in the small-cap space, as we will discuss in a future blog post. The consistently greater-than 2% net buyback yields seen on the WisdomTree Earnings Index over the last five years, combined with 2% dividend yields on this basket today, provides critical valuation support and also helps explain why we think the earnings-weighted approach can add value over time. Jeremy Schwartz, Director of Research As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.”

Middle Eastern Banks Hacked After $81 Mil Bangladesh Heist: FireEye

FireEye ( FEYE ) researchers say a series of cyberattacks on Middle Eastern banks isn’t related to an earlier digital heist of Bangladesh Bank that netted $81 million, but didn’t say whether it has ties to similar assults on banks in Ecuador and Vietnam. This month, FireEye’s DTI (dynamic threat intelligence) discovered “a wave of emails containing malicious attachments being sent to multiple banks in the Middle East region,” according to a company blog post Sunday. “The threat actors appear to be performing initial reconnaissance against would-be targets,” researchers wrote, “and the attacks caught our attention since they were using unique scripts not commonly seen in crimeware campaigns.” A FireEye spokesman told IBD the Middle Eastern assault doesn’t appear to be related to a recent attack on Bangladesh Bank, but didn’t say whether it could be tied to breaches of banks in Ecuador and Vietnam. The Bangladesh breach is one of the biggest in history. FireEye reportedly was hired to investigate . In the Middle East case, hackers sent malware-infused emails with themes related to IT infrastructure “such as a log of sever status report or a list of Cisco Iron Port Appliance details,” FireEye researchers wrote. Employees forwarded the email on, containing an infected, macros-enabled Microsoft Excel file. Microsoft Office documents are frequently used in crimeware campaigns because default settings require users to order macros to run. “Attackers may convince victims to enable risky macro code by telling them that the macro is required to view ‘protected content,’” researchers wrote. But this campaign took it a step further, hiding the malware in plain sight. “This was done for the purpose of social engineering — specifically, to convince the victim that enabling the macro did, in fact, result in the ‘unhiding’ of additional spreadsheet data,” researchers wrote. Hackers installed a batch file to collect important system data including user and group accounts, network configuration data and running processes. Unusually, the malware used DNS (domain name system) queries to extract the data. “This was likely done because DNS is required for normal network operations,” researchers said. “The DNS protocol is unlikely to be blocked and its use is unlikely to raise suspicion among network defenders.” Users can protect themselves by disabling Microsoft Office macros “and also by being more vigilant when enabling macros,” FireEye said. In morning trading on the stock market today , FireEye stock lifted more than 4.5%, outplaying the IBD Computer Software-Security industry group, which collectively was up a fraction. Palo Alto Networks ( PANW ) and Symantec ( SYMC ) stocks were up 2% and a fraction, respectively.

Market Lab Report – Premarket Pulse 5/23/16

Major averages shot higher Friday morning before giving back some of their gains on higher, triple witching options-expiration volume. The S&P 500 came up near to its 50-day moving average before heading back down as it stalled on lighter volume. A number of Fed members have spoken including: – Eric Rosengren who said the U.S. is “on the verge” of meriting a June interest-rate hike. – John Williams who recently reiterated his prior view that two to three rate hikes could be appropriate in 2016 with three to four being possible in 2017. – James Bullard, who questioned market expectations for future hikes. Bullard also voiced his confidence in recent employment figures, stating that the U.S. labor market is “at or beyond full employment.” Despite the hawkish commentary, the UK Brexit vote takes place about a week after the June Fed meeting, so it’s unlikely the Fed will raise rates at that meeting. Fed futures put the odds at 26%. Weekend updates on both the short and long side of individual stocks were sent out to members this weekend. Members should be prepared to move with the market in either direction as the indexes sit at near-term support. A strong move back up through their 50-day moving averages by the S&P 500 and the NASDAQ Composite could signal the start of a new upside move, while a significant breach of support would indicate that downside risk is increasing.