The Fall of Bear Stearns teaches many lessons. In this article I would like to put forth one of these.
In 2007 Q4, the Board of Directors implemented a share repurchase program a part of which was to acquire shares of common stock for the company's employee stock award plans. Usually a company buys back its shares when it perceives the share price as undervalued. Under efficient market theory, buying back stock should not affect the share price however it does send a positive signal to the investors - the management believes in the future of the business. Hence, keeping track of share buyback programs is one of the many indicators that complete the picture of the street. But, this indirect indicator of management's perception must be viewed in tandem with other fundamental and technical parameters, because sometimes buying back shares is implemented to improve certain valuation ratios, such as EPS (company buys back its common stock, which leads to reduced float and increased valuation of the shares). In this case, the time when BSC implemented this program it was also reporting devastating financial numbers. Its total revenues had fallen ~35% in 2007 and its operating income had suffered a massive drop of ~75% mainly because of the sub-prime mortgage crisis. Now, some might argue that the shares were actually undervalued and once the dark cloud would pass BSC's operations would resume to normalcy. However, digging deeper shows that around the same time the insiders were selling some portion of their shares contradicting the share buyback plan.
This is one good example that stresses the necessity to look at the whole investing picture, evaluate share buyback programs with caution and use such indicators only as a confirmation of the balance sheet.
In 2007 Q4, the Board of Directors implemented a share repurchase program a part of which was to acquire shares of common stock for the company's employee stock award plans. Usually a company buys back its shares when it perceives the share price as undervalued. Under efficient market theory, buying back stock should not affect the share price however it does send a positive signal to the investors - the management believes in the future of the business. Hence, keeping track of share buyback programs is one of the many indicators that complete the picture of the street. But, this indirect indicator of management's perception must be viewed in tandem with other fundamental and technical parameters, because sometimes buying back shares is implemented to improve certain valuation ratios, such as EPS (company buys back its common stock, which leads to reduced float and increased valuation of the shares). In this case, the time when BSC implemented this program it was also reporting devastating financial numbers. Its total revenues had fallen ~35% in 2007 and its operating income had suffered a massive drop of ~75% mainly because of the sub-prime mortgage crisis. Now, some might argue that the shares were actually undervalued and once the dark cloud would pass BSC's operations would resume to normalcy. However, digging deeper shows that around the same time the insiders were selling some portion of their shares contradicting the share buyback plan.
This is one good example that stresses the necessity to look at the whole investing picture, evaluate share buyback programs with caution and use such indicators only as a confirmation of the balance sheet.
