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.
The goal of the new Stock Buybacks section on InsideArbitrage is to generate a group of ideas worth exploring. While all users can access buyback information over a period of one quarter, only premium members like you can access information spanning two quarters or more.
Another feature that is only accessible for premium members is the new Double Dipper. While this sounds like the name of a roller coaster at Six Flags (SIX), it is a list of companies that are buying back their shares while their insiders are independently buying stock on the open market for their own portfolios. We are only including management insider purchases and are excluding purchases by directors and 10% owners.
We have gone through considerable effort to clean both the buyback data and the insider purchases data for the Double Dipper but it is always best to do your own due diligence to verify the data from the source. We have provided links to the SEC filings for both the form 4 (insider buying) data and the forms 10-Q and 10-K. We will continue cleaning this data as it comes in everyday. Please bear with us as we work out any kinks in these new features.
To illustrate some of the challenges with cleaning the stock buybacks information, given below is the response we received from the VP of Investor Relations from Iridium Communications (IRDM) when we wrote to the company asking why their diluted shares outstanding had dropped by 18.56% from Q4 2017 to Q1 2018 but their common shares outstanding had increased by 2.81% over the same time period.
Because of the ramp in D&A this quarter, which depressed Net Income in Q1, the add back of Convertible Shares into the per-share-calculation (which you have seen in prior quarters) would have actually had an anti-dilutive effect. As a result, GAAP requires that Convertible Shares be excluded from this calculation, as they were anti-dilutive during Q1.
We hope you find these two new features helpful. As always, we would love to hear from you if you have any feedback or any requests for enhancements to existing strategies. We are now on the hunt for a fifth strategy and hope to find something interesting in the coming weeks and months.