Summary

  • Once again, stocks of companies with high debt, volatile share prices, “value” measures and high buybacks fared the worst of the U.S. market the week ended June 26, 2020.
  • Reversing course, 93% (467 of 500) of stocks in the S&P 500 declined during the week ended June 26, 2020. The “reopening” theme stocks declined most, led by banks and energy stocks.
  • The most effective quant factors in stock performance for U.S. stocks last week were EPS estimate Revisions, Price Target Revisions, Growth and Momentum.
  • Stocks with high Leverage, Volatility, Revenue Estimate Dispersion, and Buybacks led to the downside from a quant factor perspective, along with Value stocks.
  • The Buyback Kings (the 50 S&P 500 stocks with the highest buybacks in place relative to market cap) declined -6.8% on average for the week. We believe market participants continue to underestimate the negative implications of this phenomenon. If your core holdings have been reliant on share buybacks in the past, take note of the market’s clear rejection of this factor, the graphic on page two, and consider alternatives.

Week Ending June 26, 2020 Factor Performance – Russell 3000 Index Quantiles (Sector Neutral)

Source: FlowPoint, Bloomberg

The Buyback Kings is a list of stocks riddled with energy and Old-World financial companies. With energy under pressure since 2015, plummeting interest rates and loan volumes, it is no secret that energy companies and banks have the worst organic growth prospects in the market today. So their management teams shore up sagging profit per share calculations by reducing the denominator. In decades past, buybacks have been a massively important factor in share price performance. And the further back in time we look, the more important buybacks have been to share price performance.

But this decade, this month and this week, investors clearly are less fooled by financial engineering and more enamored with organic growth. We expect this trend to accelerate. The median Buyback King has an announced buyback that totals 32% of their current market caps. If your core holdings include members of the Buyback Kings, consider alternatives.

Note: Last week, the Federal Reserve capped dividends and banned share buybacks by US banks as it released an analysis showing the Covid-19 crisis could trigger $700bn of loan losses and push some lenders close to their capital minimums.



Source: FlowPoint, Bloomberg data
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