After reviewing the historical performance of The Buyback Letter, we currently rank it as a tier 2 ranked stock market newsletter.

Positive

  • The Buyback Letter has been named to the Hulbert Digest Honor Roll multiple times.
  • The Standard edition has consistently outperformed the S&P 500
  • Editor David R. Fried has a very good reputation and long term track record.
  • Health and Bio-Tech stocks have had the strongest performance as of late.  The caveat is that the high performance coincides with a bull market in each of those two sectors.

Negative

  • The more expensive premium version has not performed as well as the standard version and has lagged the Wilshire 5000 and S&P 500. We therefore cannot recommend the premium version at this time.
  • A limited number of stocks are recommended which can increase risk and volatility to your portfolio.
  • Some stocks are held less than one year which makes it hard to replicate results due to higher short-term capital gain taxes and transaction costs.

The Buyback Letter Review

There have been many empirical studies comparing the stock returns of companies that repurchase shares versus that don’t. Academic studies demonstrate that companies that repurchased their own shares outperformed all stocks in general. The best known of these appeared in the Journal of Financial Economics: “Market Underreaction to Open Market Share Repurchases,” by David Ikenberry, Josef Lakonishok and Theo Vermaelen.

Based on the historical research showing that companies that repurchase shares outperform the general market, novice investors believe all you have to do is buy all stocks that announce large stock repurchase programs. There are a few problems with this approach. First of all, do you have enough money to invest in all qualifying stocks? Secondly, do you have the time to track which companies actually make share repurchases after they make the announcement and which use the announcement merely to gain investor confidence? Third, how do you decide which of the companies to invest in if you can’t follow all of them?

In today’s stock market environment it’s even more critical to have an experienced guide help you. The last few years have seen a plethora of stock buyback announcements as CEO’s flush with corporate cash attempt to continue to beat EPS (earnings per share) estimates through the use of stock buybacks. The buybacks decrease the number of shares outstanding, thus increasing EPS and allowing the executives to maximize their bonuses even if top line sales and revenue growth are flat or declining. This has been over more pronounced during the first two decades of the twenty-first century due to historically low interest rates.

That’s where the Buyback Letter comes into play. Editor David Fried attempts to pick the best of the best among the various companies offering stock buyback programs.  He does this by focusing on those companies that exhibit value stock characteristics. It’s worked well as the newsletter has been named to the Hulbert Financial Digest honor roll 3 years in a row and has outperformed the S&P 500 over the last decade.

Although the Buyback Letter has outperformed the S&P 500 there are tracking services showing that it’s actually lagged the Wilshire 5000. In addition, not all stocks in the Buyback letter are held for a full year which means you are paying full income tax, thus diluting any stated returns. Then there are the standard transaction costs. In addition, you hold a limited number of stocks which limits diversification and can increase the amount of risk you’re taking on.  All in all, we can recommend the standard Buyback letter but are withholding recommending the premium version, as the performance of that newsletter has lagged the standard version.