Companies buying their own stocks are doing nothing for investors.
In a note to clients Friday, Fundstrat’s Tom Lee notes that along with mega-caps, so-called buyback stocks have collectively been among the worst performers in the past week.
These stocks have also underperformed the market for the last few weeks.
Buyback announcements have surged this year — up 50% year-on-year, according to a recent Barclays estimate.
Lee wrote, “As shown below, the S&P Buyback Index (SPBUYUP) has been underperforming the broader market since March 2015. We see this as further evidence the market is rewarding companies expanding balance sheets.”
Stock buybacks are typically expected to boost stock prices. Companies buy their own shares, in part, because they believe the price is undervalued. And by reducing the supply of shares outstanding earnings per share increase and the hope is that the stock price will increase as well.
But this strategy hasn’t panned out compared to the broader market.
Here’s Lee’s chart, a Bloomberg index that tracks the performance of the top 100 stocks with the highest buyback ratio compared to the S&P 500: