The Buyback Letter

The Buyback Letter, a monthly online newsletter, is the only publication devoted to investing in companies that buy back their own stock. Editor David Fried’s exclusive research, evaluation and recommendations of buyback stocks put his subscribers at the head of the investing pack. All six of the portfolios we present in the newsletter are beating their benchmarks since inception. If fact, the Hulbert Financial Digest ranked The Buyback Letter #1 for risk-adjusted returns among stock-picking newsletters and #2 among all newsletters for the five-year period ending 12/31/2001, and it continues to rank in the Top 10 newsletters. We’re very proud of this ranking and will work hard to continue to earn it.

Each month The Buyback Newsletter is generally available by the 7th of the month at http://www.buybackletter.com/Members/. You will be notified by e-mail when the new edition is posted. Additionally, you will receive regular e-mail updates with trading instructions, our weekly sentiment readings and other pertinent information. These messages will be self-contained, and will not require you to visit the web site. You may cancel at any time.

David Fried created the Buyback strategy after he discovered the market-beating value of buying stock in select companies that are repurchasing their stock. By investing in these companies, you are putting the powerful forces of supply and demand to work in your favor. When a company buys back its own stock, it reduces the number of shares outstanding, which gives each remaining shareholder a larger percentage of ownership in the company. This often results in lower price/sales, price/earnings and price/cash flow ratios for a company’s stock, which then can lead to higher share prices and better-than-average returns.

Our quantitatively based, disciplined investing strategy is based on examining hundreds of buybacks with low risk but the potential for high returns. We start by tracking all major corporate buyback announcements. Next, he makes sure these companies actually buy back a significant number of shares (a surprisingly large number do not), so the buyback has a real impact on the value of the stock. If a stock meets all of those criteria, Fried and his staff scrutinize the firm's financial strength, cash flow, management, prospects for growth, contracts and other crucial factors to ensure that the company is rock-solid and its shares are reasonably priced.

For us to recommend a company, the stock must have the potential to double in 2-4 years, a good business story, good management and a current buyback program already underway.

Only a handful of stocks meet these rigorous standards and are recommended in The Buyback Letter.

On the Web site, you will see that the newsletter is broken into segments, for easy viewing. You may view the segments by clicking on each hyperlink separately, which allows you to focus on only those portfolios you are following, or you may view the newsletter in its entirety by clicking on the printer-friendly version link.

Editor’s Commentary: This article, written by editor David Fried, is our “cover story” and gives you insight into David’s thinking about various stocks and trends.

Performance and Trading Summary: If you want to head straight for the numbers, this is your spot to find the month’s results for all portfolios as measured against their benchmarks, plus historical performance. We’ll also remind you of hotline actions that occurred during the month.

1. Buyback Dogs Portfolio®: One of our most popular portfolios, this five-stock portfolio features Dow Jones companies that have not only been most actively repurchasing their shares, but also boast excellent fundamentals. (The name is a play on “The Dogs of the Dow,” a strategy in which investors buy those DJIA companies with the lowest P/E ratios and highest dividend yields.) In our Buyback Dogs Portfolio, we are selecting Dow stocks that are cheapest relative to their peers on an overall fundamental basis, and are buying back stock.

2. The Buyback Index: A more diversified 20-stock portfolio that consists of broad market companies that have repurchased a significant amount of their shares recently.

3. Buyback Income Index: A 10-stock portfolio for those interested in income. It features buyback companies that also pay high dividends.

Buyback Sector-Index Portfolios: Two portfolios are presented that follow specific sectors of the market. You can view the stocks currently held in these portfolios, and compare their returns against the S&P 500 and the DJIA.

1. Buyback High-Tech Sector Portfolio®: A five-stock portfolio selected from the computer, software, electronics, semiconductor and telecommunication sectors of the market. We select five stocks that, as a group, have tremendous potential for appreciation.
2. Buyback Health & Bio-Tech Sector Portfolio: A five-stock portfolio selection from the drug, medical service, medical supply and medical equipment sectors of the market. We select five that, as a group, have tremendous potential for appreciation.

The Buyback Letter Stock-Pickers Portfolio: This group of 15-30 stocks is the editor’s canvas for personal stock selection. It differs from the other portfolios in the following way: We believe every stock in this portfolio is capable of doubling in 2-4 years; in the other portfolios, we expect the collection of stocks to double in 2-4 years while we rotate the stocks on a regular basis. Tables allow you to see the portfolio detail, as well as the track record from the date of purchase, and a performance summary. There is also a chart of formerly held stocks that we recommended to sell. You will also find a link to News Briefs – earnings reports and other news items about the companies whose stock we currently hold in this portfolio.

Buyback Hotlines: In addition to The Buyback Letter, which is posted monthly, we send out periodic e-mail Hotlines to our subscribers. These usually are sent weekly, but will be sent more often if market conditions dictate. Hotlines contain any new buy or sell recommendations for all of our portfolios, and a “sentiment indicator,” which is an average of investor sentiment readings from Investors Intelligence, Consensus Index, AAII Index and Market Vane. We use this tool as a guide for investing new funds into the market, not as a way to time the market. We do not advocate market timing since we know of no market timing systems that are reliable over time.

The current and prior Hotlines are also available on the web site near the newsletter links.

We suggest the purchase of at least 20 stocks for a diversified investment. Consider purchasing two or three of our portfolios. Commit an equal dollar amount to each portfolio, and then buy equal dollar amounts of each stock held in the model portfolios that you have selected.

For example, you might choose our 20-stock Buyback Index®, a highly diversified portfolio of companies across the market. If you chose this option you would invest equal dollar amounts in all 20 stocks. Or try a combination of the 5-stock Buyback Dogs® portfolio, the 5-stock Buyback High-Tech Portfolio® and the 10-stock Buyback Income Index®, which would also give you 20 different stocks. (If you choose this option, you would invest 3.3% of your funds in each stock in the 10-stock Buyback Income Index®, while placing 6.6% of your funds in each stock in the 5-stock Buyback Dogs® portfolio and 6.6% of your funds in each stock in the 5-stock Buyback High-Tech Portfolio®.)

There are several other ways investors might choose to begin. Which you choose depends on your personality and goals. Please remember that the object is for you to generally model the percentage of your stock holdings by following our model portfolios. We realize that by following our advice to put an equal dollar amount into each stock in several portfolios, your percentages will naturally differ from ours in the models, since ours will reflect appreciation over time.
Whatever combinations of stocks you choose, we recommend that you buy all the stocks in a given model portfolio. For example, please do not cherry pick 2 stocks from one of the sector portfolios, and 3 stocks from the index fund, and ignore the rest in those model portfolios. This flawed technique will expose you to unacceptable risk. If you are going to model your holdings on a certain portfolio, please buy all the stocks in that portfolio.

No matter what technique you use, follow along with our Hotlines each month, buying and selling the stocks we recommend as we update the portfolios.

Only you can determine how much money you are comfortable investing. Once you have decided that, when choosing from among our various options you also may wish to consider risk, how much trading activity we recommend in each portfolio and how long we generally hold the stocks, and the number of stocks in each portfolio.

Here’s a brief snapshot of each portfolio, for easy comparison. Keep in mind that figures are approximate and may vary over time:

Buyback research: Be sure to read all of the free information available on the Buybackletter.com home page. This information is listed at the bottom of the page under the headline “The Buyback Advantage--Free Information on Buyback Stocks." The information contained in these reports will give you important insight and background so you can take full advantage of The Buyback Letter.

Q: What does The Buyback Letter look for in a company?
A: Strong management, a good business plan, substantial buyback already occurring, and the likelihood of doubling our investment in 2-4 years.

Q: Don’t companies often announce buyback plans and then not follow through on them?
A: Yes. In fact, the announcement of a buyback plan can be a strategy used by a company to try to boost its stock price. The company presumes that investors will be impressed and will perceive that the buyback plan indicates some insider knowledge that the stock is currently undervalued. We track buyback announcements and The Buyback Letter only recommends companies that have already followed through and begun to repurchase shares, and that make it through our other filters.

Q: Aren’t companies better off reinvesting their profits back into the business and not buying back their own stock?
A: Each situation is different, but the companies we recommend are generating enough cash to both reinvest in their businesses and buy back their stock.

Q: Aren’t companies better off acquiring other businesses instead of buying back stock?
A: No! When companies make acquisitions away from their core businesses, they often squander billions in shareholder money. Some famous examples are AT&T’s acquisition of National Cash Register and Coca-Cola’s acquisition of Columbia Pictures. Both subsequently divested these ill-fated ventures.

Q: Is The Buyback Letter going to tell me when to get out of the market?
A: We are not market timers at The Buyback Letter. We have never seen a market-timing system that was reliable. In fact, it is during market declines that companies will repurchase the most stock and thus set the stage for the next growth spurt in their stock price. We believe that successful investing is a disciplined process, and through our calm, rational approach we can maximize our stock market returns.

Q: Does The Buyback Letter use stop loss orders?
A: No. When you sell stock in a company that has an ongoing program to buy back its own shares, it may very well be the company itself that is on the other end of the transaction. They have more information that you do and, more often than not, will be on the winning side of the trade. Our price targets are based on a 2- to 4-year window. Price fluctuations along the way are expected.

Q: Do you always sell when a price target is hit?
A: Not always. If a company is still repurchasing its shares, we will continue to hold the stock. Often a company committed to share repurchases will finish one repurchase commitment and then announce an additional buyback plan. If the fundamentals are still in place that make that company a good value for us, we will continue to hold that stock.

Q: How often do you recommend stock buys and sells?
A: The short answer is, “As often as is necessary.” The longer answer is that it generally varies with each portfolio. For example, in the Health and Bio-Tech Index, there is anywhere from 60%-80% turnover each quarter. In the Buyback Dogs portfolio, there might be three trades a year. I make recommendations I believe will improve the rate of return, yet I am not changing simply for the sake of change. There is no reason to waste time buying or selling stocks if it is not likely to improve your return.

Q: Every few months, I have an amount of new money to invest. How should I invest my new money to do it in the most efficient way and minimize my fees? For example, if I have chosen two portfolios – the 20-stock Buyback Index, and the 5-Stock Health & Bio-Tech Portfolio, am I to divide up the amount of new money I have precisely evenly between each of the 25 stocks I own?
A: Our general answer is to invest new money so that you have, more or less, an equal dollar amount of all the stocks you hold. But let’s drill down deeper and get specific, so you can see how it might work. First, we presume you will be paying online commission rates, which range from about $5-$12 per trade. That’s pretty cost effective. However, if you are talking about putting $100 each into 25 stocks, at $12 a trade, then that becomes too high a percentage of fees for the net result; so you must certainly use your common sense about how many stocks to add to, relative to the fees generated. Next, take a look at the amount you have in each of your stocks. It is highly unlikely you would have the exact same amount of money in each stock (due to price fluctuations, splits or other such changes). So the introduction of new money is an opportunity to balance the amount you have in various stocks to achieve a more equal apportionment. Remember, your balancing act doesn’t have to be exact; pretty close is good enough! So, for example, if you find that you have five or six stocks of your 25 that are significantly below the rest of them, concentrate the flow of new money into those particular stocks to even them up with the rest.

Q: What if I don't like some of the stocks within your established portfolios?
A: We recommend that you buy all the stocks in a given model portfolio, and that you do not "cherry pick" by selecting only certain stocks. The portfolios were designed to work as a group of stocks, not as single stocks, and the success of each portfolio is built on that strategy. Cherry picking will expose you to unacceptable risk. Our theory is that a group of buyback stocks will outperform the market. We have not been able to accurately predict, with certainty, exactly which stock in any given portfolio will be the high flier. But together, they are designed to soar.

Q: What about the same stock being in two different portfolios? It doesn't make sense to buy it twice.
A: If you are buying two portfolios, and a certain stock is listed in each portfolio, please add the two proportions together when you make your purchase. You will then have more of that particular stock than you would of the others, since it reflects a position in both portfolios.

Q: If I select stocks I like from your recommendations, building my own selected portfolio, what's so bad about that? I will still get buy-sell-hold recommendations on those stocks in your Buyback Letter to take appropriate action, won't I?
A: Yes, you will always get the recommendations, and we have no way of knowing which of our subscribers bought which stocks in what quantity. But from year to year, like all investors, we are not sure exactly which stocks will outperform. If we knew that, we would have mythical investment powers! We do know that the Hulbert Financial Digest has consistently rated The Buyback Letter in the top 10 among all investment newsletters, both for overall returns and for risk-adjusted returns. We're definitely doing something right, and our strategy, which you subscribe to and which we also hope you follow, is this: choose several model portfolios that suit your personality and goals, buy all the stocks in those portfolios, generally modeling the percentage of your stock holdings by following our models. Then take our monthly advice on what to buy, sell and hold, and you will have gained the advantage of The Buyback Strategy. This will put you head and shoulders above the rest of the investing pack.

Remember, you can get the current issue at: http://www.buybackletter.com. You may wish to bookmark this page for quick reference.
If you have questions or comments regarding your Buyback Letter member account, please contact us at webmaster@buybackletter.com

If you need help in trying to decide how to make the best use of the newsletter, feel free to call the editor, David Fried, at (310) 459-9196 or e-mail him at david@buybackletter.com. We are always glad to get your feedback and your suggestions on improving The Buyback Letter.