Buyback Wednesdays – Stock Buyback in a Net-Net

Welcome to a new weekly series of articles we are launching today on Inside Arbitrage to track the top stock buyback announcements during the prior week. We have been tweeting about buybacks for several months as you can see below and decided to start writing about them in a weekly article to provide more context.

We wrote the following in a premium blog post almost four years ago when we first started tracking buybacks on Inside Arbitrage.

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 companies in the list below are the ones that announced the largest buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies are microcaps with a market cap below $300 million. We might apply a filter going forward to exclude microcap stocks but the downside is that we would have missed Acacia Research (ACTG) had we applied that filter today.

When reviewing the list yesterday, I was struck by the fact that the company announcing the largest buyback also happens to be a net-net. A net-net is a company where its market cap is less than current assets minus total liabilities. Acacia’s market cap as I write this article is $210 million. As of December 31, 2021, the company had $731 million in current assets, a majority of which are cash and short-term investments. Total liabilities for the company are $335 million, leaving the company with $396 million in fairly liquid assets. This is nearly double the company’s market cap.

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