This weekend I’d like to introduce you to Braden Copeland, the newest member of the Bonner & Partners team.
Braden is the perfect addition to our business.
He’s a polymath entrepreneur with an eye for detail. And his research and investment analysis abilities are second to none.
But what I really like about Braden is that he’s gone out and done a lot with his life. That means he can speak about business and investing from experience. He doesn’t spout empty theories…
In the newsletter business there are a lot of armchair analysts who write about building wealth, but who have never gone out and gotten involved in real businesses. They haven’t been in the trenches. Braden has.
He started working in the pit crew at NASCAR races. Then he built a real estate company from the ground up. By the time he left to fulfill his dream of being a stock-car racer, the firm counted 200 employees.
Later, when Braden decided to invest in a rock band, the band’s accountant warned him: “These types of deal rarely work out.”
But Braden knew he was onto something. That band was the Zac Brown Band. Maybe you’ve heard of them. Two million dollars in album sales later, Braden’s still getting royalty checks in the mail while he concentrates on looking for exciting new investments.
Outside of his stock market research, Braden’s also involved in a private company that’s working on a new line of products with one of the largest manufacturers in the world. Then there’s the private insurance company of which he’s a part owner. And he’s still a partner in the real estate company as well as a popular food business in Austin, Texas.
Braden also ran the popular investment advisory Inside Strategist. (The Wall Street Journalquoted his work.)
Naturally, I’ve wanted to team up with Braden for a long time.
When I finally got the opportunity I jumped at it… and managed to convince Braden to bring his research skill and experience to Bonner & Partners.
Below you’ll find some of the unique analysis that Braden is known for. You can expect to see a lot more from him in the coming weeks. You see, we are working with Braden to create a new service focused on building wealth. And it’s unlike anything we’ve done before.
Even my dad, who’s difficult to impress, has been wowed by Braden’s work.
I’m very excited about the upcoming launch of his new service. Be on the lookout for more about that next week.
Beware the Half-Truths
Have you ever told a half-truth?
Sure you have. We all have. At least one a day when we were kids.
“Mom said I could!”
“Yes. I heard her. And she said you could only if it was okay with me.”
In investing, we hear half-truths all the time.
Just consider the analyst telling you XYZ stock is paying a great dividend while failing to mention the company is borrowing money to pay it. Perhaps the borrowing isn’t an issue. But it’s an important part of the story.
Or consider the CEO who suddenly sells gobs of company stock just before Thanksgiving 2007. He explains he did it for “personal reasons.”
Weeks later, his company announces it will have to revise its financial statements. Shares plummet overnight from over $40 to just over $20.
It’s a true story. The company, Verifone Systems, Inc. (NYSE:PAY), makes credit-card readers I’m sure you’ve used in a store checkout line. Here’s the nasty crash:
Some half-truths can be harmless. Others, like the Verifone CEO’s, can be extremely misleading. Still others, although not an immediate problem, can obscure what’s truly meaningful.
Buybacks Hit Extreme Levels
Recently, there’s a half-truth report circulating that fits the obscuring type.
I want to bring it to your attention today because it leads to something essential you must consider when investing in stocks.
The report, which is accurate, tells us that share buybacks (the repurchase of shares by a company to reduce the number of outstanding shares in the market) for US companies in 2013 hit their second highest level of all time: $500 billion. The highest level was in 2007, when US companies bought back $650 billion of their own shares.
Most coverage of this story looks at the pros and cons of these repurchases and what they indicate about corporate investment and economic growth.
The general idea is extreme buyback levels may show companies anticipate a weak economy ahead and have concluded reinvesting in the business is not a top priority. (Note that the last time we hit such extreme buyback levels was just before the Great Recession.)
So far, the telling of the story is fine… right up until you get to the half-truth part: What about increases in outstanding share count due to selling or executive compensation plans that might offset these buybacks?
It’s a question that’s rarely answered directly. When you hear a CEO touting his buyback plan in a press release, he’s like a kid. He’s telling you the good news, but not giving you the full picture.
To get the full picture, you need to take one more step. You need to see for yourself if the company is selling shares that might offset the perceived impact of the buyback.
Is the Circle Getting Tighter?
For the answer, you want to look at the company’s net repurchases. This is how much money the company used repurchasing stock less the amount of money the company generated selling stock.
You want the net repurchases to be positive, both for the trailing four quarters and over the long term. In other words, you want to know the company is in the habit of buying itself, not selling itself… tightening the circle, not making it bigger.
Think about it like this:
Pretend you and nine cousins have an extremely rich grandfather.
When he departs this rock, he has decided the 10 of you will split the estate, which is expected to grow from $75 million to $100 million by the time he dies.
Then one of your cousins gets in a jam. He needs some emergency money.
Your grandfather says he will give him $1 million, but he’s out of the estate for being foolish. That cousin will not share in the ultimate inheritance or, by definition, any of its growth.
Your cousin takes the emergency $1 million anyway. There are only nine of you left to split the final estate. The circle is now tighter.
Just by buying out your cousin, your grandfather has made your – and the rest of your cousins’ – shares worth more.
Instead of $10 million, your interest in the estate is now projected to be over $11 million. And you’ve done nothing. Imagine how much better off you’ll be if another cousin or two gets into trouble.
Then you find out your grandfather has been a bit of a scoundrel during his recent trips to Rio. The family lawyer has informed you that you have 11 more cousins with legitimate claims to the estate. And your grandfather has just updated his will splitting the inheritance evenly among all 20 of you.
Sleeping around in Rio, your grandfather has effectively sold more of his estate. He’s made the circle bigger. As a result, your, and the rest of the original cousins’, projected share has plummeted from over $10 million to $5 million ($100 million divided by 20 cousins).
Buying back and selling shares of a company works exactly the same way.
Existing company shareholders are much better off when company management is buying shares and tightening the circle (you’ll sometimes see it described as returning capital to shareholders). Shareholders end up worse off when company management is selling shares (raising capital) and expanding the circle.
This is why, generally, when a company is selling more stock than it’s buying, the situation needs to be investigated.
Know Exactly What to Buy Before the Next Crash
The buyback story doesn’t give you the complete picture.
It’s a half-truth.
And when it comes to investing real money, you don’t want to be investing in half-truths.
And you especially don’t want to be investing in half-truths in a market crash. That’s when you need to know…. and you’ll know if you have my “Open in Case of Emergency” report…
If you’re not familiar with the “Open in Case of Emergency” report, it’s a completely new body of work that reveals the companies you must buy, without hesitation, during the next market crash. Being prepared and buying in a crash are among the best ways to realize extraordinary gains.
But… you need to know exactly what to buy. And that’s the list of stocks I have for you in the report.
To arrive at the final list, I run every stock in the US through an analysis I explain for you in detail in the report. That way you can understand the results. It’s an open book. And my analysis includes looking at net repurchases, not just the gross amount.
There are only six stocks that make the final cut. Not a single stock you would expect made the list. (And, in my report, I’ll show you exactly why, too.)
You’ll be hearing more about how you can get your copy soon.
For now, keep in mind that stories about buybacks are only half-truths.
And next time you hear a CEO touting his great buyback record, go check the number of shares outstanding over the last few quarters. That will give you the complete picture.