We are very excited to launch a new strategy on InsideArbitrage that we have been working on for some time now. After launching the spinoffs section on InsideArbitrage, we were hunting for another event-driven strategy to add to the website and decided to start exploring stock buybacks. We were specifically interested in companies buying back enough of their own stock to offset the effects of dilution from stock based compensation and other corporate events. Towards this end, we decided to mine quarterly reports (form 10-Qs) and annual reports (10-Ks), for changes in shares outstanding instead of relying on stock buyback announcements.
There has been a lot of academic research over the years that shows the superior performance of companies buying back their own stock. Recent research into the “uber cannibals”, defined as the top 5 companies buying back their own shares, by Mohnish Pabrai as discussed in the article Move Over Small Dogs Of The Dow, Here Come The Uber Cannibals, shows that the uber cannibals have outperformed the S&P 500 index by 6.3% annualized over a 26 year period. Not all buybacks are in the best interest of investors and we have all heard of companies like Citigroup (C) using capital to buy back shares right before the financial crisis. The company was subsequently forced to receive the biggest bailout of any American bank. On the other hand, we have also seen the masterful use of stock buybacks by some CEOs to generate outsized returns for their investors as discussed in the book The Outsiders by William Thorndike.