Are These 2 Stocks Wasting Your Money?
Jul 3rd 2012 6:12PM
Updated Jul 3rd 2012 6:18PM
Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself. Rather, use it as a launching pad for additional research.
More, more, more!
This might be the new norm among network equipment makers -- buying back their shares as they've fallen low. Last time out, I noted that Riverbed Technology's (NAS: RVBD) had doubled the size of its repurchase program authorization to $150 million, and now Aruba Networks (NAS: ARUN) is authorizing a new $100 million buyback program.
The problem seems to be that analysts think network equipment makers like Riverbed, Aruba, and Acme Packet still have further to fall. Analysts at Pacific Crest say the whole sector is running headlong into economic headwinds that will see customers pull back on purchases. They might still make software buys, but hardware tends to get cut first.
Is there something to that? When I wrote about Riverbed, I pointed out it was in the midst of a product transition phase, causing customers to hesitate on making purchases and which led to a 47% drop in net income in the first quarter. Maybe it wasn't just the product cycle that was the issue. Aruba's fourth-quarter results saw weakening demand in Europe, underscoring analyst concerns about the sovereign-debt crisis, and Acme witnessed a 4% drop in revenues that caused profits to dramatically plunge from the year-ago period.
Of course, the upside view is that Aruba needn't buy shares right now so that should analyst fears pan out, it will be able to repurchase more at even lower levels. Of course, the stock is 50% below where it traded last year, though it has bounced off its lows.
More than 300 CAPS members have weighed in on Aruba, and more than 91% see it going on to beat the market averages. Add its stock to your Watchlist and let us know in the comments section below or on the Aruba Networks CAPS page whether you think there will be lower prices to scoop up shares.
A silver lining
Analysts aren't thinking much of the intermediate growth prospects for silver miners these days, either, and Moody's says that while Coeur D'Alene Mines (NYS: CDE) ought to be able to have productive operations out of its Palmarejo and San Bartolome mines, which account for the vast bulk of its silver and gold production, it also increases the risks associated with operational problems that could arise at one or the other. Coupled with pricing pressures and higher cash costs than some of its rivals, Coeur D'Alene may not have the worst behind it.
Silver trades below $30 an ounce on the spot market after an amazing run to $50 an ounce last year on fears of rampant, runaway inflation caused by Ben Bernanke's monetary policies. That the feared devaluation didn't happen right away caused silver's price to plunge, taking with it many promising miners including Coeur D'Alene, whose shares fell 27% over the past year; Hecla Mining (NYS: HL) , off 37%; and silver streaming specialist Silver Wheaton (NYS: SLW) , down 18%.
Hecla's shares have probably taken a larger hit, because it's suffered from the kinds of operational issues analysts fear could sink Coeur D'Alene. It suffered a setback when regulators shut down its lead Lucky Friday mine until 2013. Contrast that with Silver Wheaton, which doesn't have mining operations itself but takes the streams produced by others, and the diversified risk explains its lower losses.
CAPS member cajun1958 seems cautiously optimistic Coeur D'Alene won't run into any buzzsaws like Hecla and finds the silver miner "selling only marginally above book value and while Au & Ag may not continue to rise they don't seem likely to fall soon." That might make its own new $100 million buyback program opportune.
You can add your opinion in the comments section below, and then add Coeur D'Alene Mines to the Fool's free portfolio tracker to see whether this turns out to be a waste of money for shareholders or a rich vein of opportunity.
Waste not, want not
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At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio . The Motley Fool owns shares of Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Riverbed Technology and Acme Packet and creating a synthetic long position in Riverbed Technology. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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