Broadly speaking, there are plenty of different metrics that analysts and investors can employ when trying to determine whether a stock is undervalued or not.
Key Takeaways:
- There are many methods to identify a good value opportunity. One standout strategy is to find companies conducting opportunistic stock buybacks.
- Stock buybacks, when performed at a discount, can signal confidence in the company’s mission and also benefit existing shareholders.
- The Tweedy Browne Insider + Value ETF (COPY) employs this approach, seeking out value companies that are either engaging in stock buybacks or seeing company insiders purchasing company stock.
Of course, it’s important to employ an approach that can be most beneficial for a value strategy. For the team at Tweedy, Browne, share buybacks serve as a key evaluation metric.
For the uninitiated, share buybacks are when a company purchases its own shares, reducing the total number of shares on the market. Oftentimes, these buybacks occur on the open market, but companies may also look to buy shares from existing shareholders as well.
Traditionally speaking, companies employ share buybacks for a few reasons. Some do so to return capital to their shareholders while creating a stronger signal of confidence. Other companies may do so in order to make their valuation potentially more appealing.
For value investors like the Tweedy, Browne team, it’s crucial to keep an eye out for good opportunities amid share repurchases. When companies buy back their own stocks below their intrinsic value, these buybacks then directly increase the value of the shares for continuing shareholders.
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“Share repurchase at a big discount to intrinsic value is akin to mini M&A,” noted Jay Hill, managing director at Tweedy, Browne. “I.e., every share bought back is like a small takeover of the business that management knows best — their own company.”
